For differentiated equity play, try out special situations funds

Long-term investors eyeing differentiated equity portfolios could consider funds focused on special situations, or business cycles, that often cause a wide variation in the valuation of an enterprise or a bunch of companies in the entire sector.

Wealth managers, however, believe investors must have a higher risk appetite and patience as such investment cycles could often take longer than anticipated to play out.

Fund managers believe all companies face challenges across their lifecycles. Challenges could come from competition, regulations, or board-related conflicts. During such times, many companies with sound fundamentals could see sharp corrections, which present an entry point for investors as strong companies with sound management will come out of such situations.


"Special situations funds typically follow a bottom-up approach of stock picking with an emphasis on identifying companies going through corporate restructuring, spinoffs, M&A, or some unique challenges, such as change in management or impact of major policy alterations," said Deepak Jasani, head of retail research at HDFC Securities.

ICICI Prudential Opportunities, the largest fund in the space, eyes special situations by buying into companies going through temporary challenges. Franklin India Opportunities Fund has built a portfolio focusing on three long-term themes: digitalisation, sustainable living, and Make in India.

Axis Special Situations identifies companies benefiting from disruptive change or witnessing a turnaround potential from a prolonged cyclical slowdown and Aditya Birla Sun Life Special Opportunities Fund invests in opportunities that arise in corporate restructuring, government policy changes and companies going through temporary but unique challenges.

Over the past year, fund managers have identified opportunities in sectors such as auto, power, metals and mining.

"These funds often look at unlocking value, aim to spot cycles early, ride through it which helps them generate higher returns," said Nirav Karkera, head of research at Fisdom.

Karkera believes aggressive investors can include these schemes due to their low overlap with other diversified schemes. He recommends ICICI Prudential India Opportunities Fund and Franklin India Opportunities Fund.

Financial planners believe that all these funds are market-cap and sector-agnostic funds and could take concentrated bets on certain themes and stocks. Often, these themes or strategies could take time to play out and hence investors need a longer time frame.

"Although returns of special situations could be high, they come with their own set of challenges. Returns could be bumper for certain intervals and lean for some other period," added Jasani.