Diversified equity mutual funds allow investors to invest in a variety of ways. There are value-style funds, growth-style funds, blend funds that follow a combination of both value and growth, contrarian funds, and funds that have an inclination (driven by their investment mandate) to a market valuation – large-cap, mid-cap, small-cap, micro-cap, multi-cap, etc.
In addition, there are sector/thematic funds. However, despite a ten-year track record, there is one less-known category of funds where the fund manager is constantly on the hunt for sectors that can gain from changes in the micro and/or market environment.
The fund manager is able to reap the benefits of wealth-creating advantages derived from changes in policy, industry-specific restrictions, trade treaties, and a variety of other factors. This type of diversified equity programme is referred to as a ‘Opportunities Fund.'
What are Opportunity Funds?
An opportunity fund is a form of mutual fund that invests in businesses and industries with a lot of space for growth and expansion. These funds are overseen by the fund managers, who invest investor’s money in the stocks of companies that they believe have a strong capability to grow. These opportunities might be stock-specific, sector-specific, industry-specific, thematic, or any combination of the above.
What are some of the sectors in which opportunity funds invest?
Opportunity fund managers search the entire financial market for investment opportunities. These funds may invest in large-cap, mid-cap, or small-cap enterprises, depending on the nature and profitability of a possible opportunity.
Managers of opportunity funds, on the other hand, tend to favour industries and areas with strong growth potential. This varies according to the economic, political, and social situation. They invest in a wide range of industries, including technology, power generation, vehicles, oil and gas, pharmaceuticals, finance and even infrastructure.
How about theier ability to invest across market capitalizations?
The market is flooded with diversified equity funds, and there are a variety of market capitalization-based funds, such as mid-cap and large-cap funds. Opportunity funds, unlike similar measures, do not depend on or display a market capitalization bias; instead, they operate across numerous market capitalizations depending on opportunities and employ a flexible strategy.
It would be a mistake to assume only great profits and reduced market volatility if a strategy invests only in large market capitalization. Instead, there is always a risk aspect to consider, as well as the market's normal dynamics. In this instance, the fund manager may adjust the portfolio based on market possibilities, which could result in a significant loss for the investors. Given the flexibility of opportunity funds, it would be prudent to diversify across several investments.
High returns and a high risk in an opportunity fund
Opportunity funds are high-risk, high-return investment opportunities, as a volatile market situation will always give opportunities that appear good enough to generate impressive gains, but such high returns are always accompanied by higher risks.
If policy or regulations do not favour the sector or industry, and the stock price goes against the fund manager's expectations, the decision to invest in a stock of that theme, sector, or industry may cause the fund's performance to deteriorate.
Opportunity funds typically invest in 4-5 sectors or businesses that the fund manager believes will outperform other sectors and the overall market. Needless to say, a portfolio with such a concentrated holding, entails a larger risk than one with a well-diversified holding across sectors, themes, industries, market capitalizations, and so on.
Role of the fund management
An Opportunities Fund's performance is largely determined by the fund manager's ability to spot profitable opportunities. A fund manager must not only have a thorough understanding of how firms in each sector/theme operate, but also be able to predict how policy changes, for example, would affect these businesses or areas of the economy.
Years of practice help to improve this expertise and it's possible that only a handful of people will be successful. Even the best fund managers might be proven wrong by the market at times.
How to locate such a fund?
The National Council of State Housing Agencies (NCSHA) Opportunity Zone Fund Directory lists qualified opportunity funds that can be filtered by investment objective, fund size, or geographic focus.These funds must invest at least 90% of their assets in Qualified Opportunity Zone properties and can be chosen by filling out Form 8996.
How is turnover ratio defined in opportunity funds?
The portfolio turnover ratio is the rate at which the fund managers buy and sell assets in the fund. To put it another way, the turnover ratio is the percentage change in a fund's assets over a one-year period. Investment funds tend to have a high turnover rate since the fund manager is always looking for stocks that can generate value in the short to medium term.
Instead of divesting stocks that haven't performed as predicted, he can invest in new ones that are more likely to succeed. When trying to maximise the returns, he may end up constantly churning the portfolio.
Long-term financial goals?
Investors might use opportunity funds to enable them attain their long-term financial goals. They're an excellent investment opportunity for new investors who are willing to take on some risk. Another advantage of these funds is that they may be combined with other investment options to decrease risk and boost return.
What function does the portfolio play?
A lot of backend procedures are done by the fund manager to make the portfolio stand out, but in the end, understanding what is good and incorrect in the portfolio can assist the fund manager add value and minimise uncertainties in it. Opportunity funds, which have a short-medium term and return big gains, can be utilised to pay off investments that have failed to produce results.
After that, take the opportunity's returns and utilise them to start a new calculated investment to maximise your profits.This process repeats again, with the bad investments being removed from the portfolio by paying off those that did not turn a profit, while the right thing of investing in schemes that are already turning a profit can help diversify the portfolio and set it apart from the competition.
Who should invest in an opportunity fund?
Diversified equities funds can be effective on their own or in combination with other investment options for an investor with a risk appetite and long-term goals such as investing for a child's schooling, retirement planning, or child's marriage.
Investing in opportunity funds is risky, but it may pay off handsomely if done correctly. To diversify market capitalisation, the fund manager takes advantage of changes in government policy, industry-specific rules, trade agreements, and other variables.
Short-term investors can invest in opportunity funds because they provide higher returns with the added risk of market volatility. However, a solid understanding of how the market operates and the ability to make quick judgments is also crucial.