Opportunity funds: Tap unique investment ideas for good returns

Says Gopal Agrawal, CIO, Mirae Asset Global Investments: "We have a mix of core and tactical approach, where a chunk of the portfolio focuses on stable businesses for the long term, and the rest is directed towards short-term opportunities due to policy changes, global events, etc."

Given the nature of these schemes, it is not surprising to see the underlying portfolio change colours at frequent intervals. Such is the level of flexibility that at one moment, the portfolio could be tilted in favour of banking stocks, but a few months later, you may see a shift towards the consumption sector.

Since investment opportunities come and go, the fund manager has to move deftly to catch new ones as and when they arise. It is this investment approach that allows them access to—and benefit from—opportunities across market segments.

Watch out for

Before you blindly bet on opportunities funds, ask yourself whether it will add value to your portfolio. It's also important to be aware of the risks involved. The modus operandi of such funds boils down to the fund manager's stock-picking ability and nose for sniffing out good opportunities.

While a well-managed fund can add significant value over the long run, a poorly managed one could erode your capital. The enhanced flexibility in the investment approach also presents a higher level of risk for the investor. This fluidity often leads to a higher portfolio churn as the fund manager attempts to deliver good returns. A higher turnover means more transaction costs, which eat into returns.

Sustainability in performance is another thing to watch out for. There are funds that pick up a few ideas and do well over a particular period, but miss out on sound ideas later or make wrong bets, resulting in a downturn in performance.

Performance

The basket of opportunities funds has around 12 schemes, and as with their differing investment focus, the performance is also a mixed bag. The ones that stand out include Reliance Equity Opportunities, UTI Opportunities, Mirae Asset India Opportunities and L&T India Special Situations (erstwhile Fidelity, which have done well across time frames.

"What has worked for us is the focus on stock selection, identifying businesses which generate strong cash flow and boast healthy return ratios," says Agrawal. Kotak Opportunities and DSP BlackRock Opportunities have also delivered decent returns. However, some like Birla Sun-Life Special Situations, HSBC India Opportunities and DWS Investment Opportunities have struggled to deliver good performance.

Final word

Though these dedicated funds have the required expertise and research capabilities to mine ideas round the clock, you should be choosy while taking your pick. First, understand what the fund is trying to do in terms of its investment focus. This will be explained in its investment objective. Then check the consistency in performance, so that you know if the fund can identify and make good of opportunities continuously.

Also check if the performance is sustained across market cycles. Lastly, make sure the fund is not taking too high a risk to capture emerging ideas and check the scheme's risk profile through online research portals like Value Research.