Q. I am a 33-year-old professional working as an interior designer in Mumbai. I have recently been promoted by my firm and have received a considerable salary bump. I have been investing in Index mutual funds tracking Sensex and Nifty, however, I now intend to take riskier bets. I have heard from my acquaintances that I should explore investing in Special Situation Funds (“SSF”). I tried researching about SSFs, however, there were a lot of web articles about SSF Mutual Funds as well as SSF Alternate Investment Funds. Can you please differentiate between the two and can you please elaborate on what should an investor keep in mind while investing in SSF?
Dinesh Chakrobarty, Thane, Maharashtra
Mutual Funds as well as Alternate Investment Funds (“AIF”) have a sub-category having the nomenclature Special Situation Funds. As a result many investors while researching on the internet get confused between SSF mutual funds and SSF AIF. Before we go ahead and elaborate on SSF mutual funds we will first elaborate on the differences between mutual funds and AIFs.
AIF - Explained
AIF is a fund established in India under the Securities and Exchange Board of India’s Alternative Investment Funds Regulation, 2012 (“SEBI’s AIF Regulation”). AIF is a privately pooled investment vehicle that collects funds from sophisticated investors, both Indian and foreign, for investing in listed as well as unlisted companies.
To summarise, AIFs pool-in money from high-net-worth investors who have a high-risk appetite and thereafter make high-risk investments in listed as well as unlisted companies. Given the high ticket size (most AIFs have a minimum investment threshold of ₹1 crore) most retail investors will find SSF AIFs out of their reach.
SSFs, which will exclusively invest in "special situation assets" and may act as a resolution applicant under the Insolvency and Bankruptcy Code, 2016 have been accepted as a subcategory under Category I AIF (IBC) pursuant to the amendment in SEBI AIF Regulations in January 2022. SSF-AIF will be able to take part in the insolvency and bankruptcy proceedings under the Insolvency and Bankruptcy Code, 2016 (“IBC”) pursuant to this amendment.
As per the applicable regulations, SSFs will only invest in special circumstance assets in order to direct their attention towards stressed assets. Such assets consist of:
- Stressed loans that are transferred in accordance with Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 or as a component of a resolution plan permitted under IBC.
- Security receipts issued by Asset Reconstruction Companies (ARC); and
- Securities of investee companies with (i) stressed loans that are available for acquisition in accordance with Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 or as part of a resolution plan approved under IBC; (ii) borrowings for which an ARC has issued security receipts; (iii) borrowings that are subject to corporate insolvency resolution under Chapter II of IBC, etc.
SSF mutual fund explained
In terms of investment, an exceptional situation is often described as an occurrence that leads to either a corporate reorganisation that modifies the core of the business model or a change in the ownership of the shareholders.
Few instances of special situations in the life of a company are as follows: demergers, litigation against the company, the sale and liquidation of a business unit, mergers, and other corporate events as unusual situations.
Very often investors have excellent buying opportunities in these unique circumstances. However, investing in exceptional situations has a very high level of risk and might have significant consequences if the investor makes the wrong decision.
Overview of SSF mutual funds in India
Three funds—ICICI Pru India Opportunities Fund, Axis Special Situations Fund, and Aditya Birla Sun Life Special Opportunities Fund follow the special scenario theme and have combined assets under management (AUM) of just under ~ ₹9,400 crore.
These funds, however, have a more expansive mandate to choose companies based on opportunities presented by sector and economic trends as well as business actions, in contrast to the traditional special situation fund in western countries, which often keeps a focused portfolio, these schemes, have invested in between 44 and 72 stocks, and have a diversified portfolio.
India opportunities fund by ICICI Prudential
With a mandate to invest in three sorts of special situations (a) temporary crises in a company, sector, or economy; (b) regulatory changes; and (c) global events, this fund offers good buying opportunities. This fund is the oldest special opportunities theme mutual fund operating in the industry currently, it was established in January 2019.
The fund has produced a respectable 26.32% CAGR (compounded annual growth rate) as on 10 January 2022, over the past three years, helped by the market's current preference for value investing.
Special opportunities fund from ABSL
The ABSL Special Opportunities Fund was introduced by the fund house on October 23, 2020. This programme searches for the following special opportunities: (a) temporary crises in a company, sector, or economy; (b) regulatory changes; and (c) global events. The fund has produced a respectable 23.62% CAGR (compounded annual growth rate) as on 10 January 2022, since inception.
Special situation fund by Axis Mutual Fund
The special situations fund was launched by Axis Mutual Fund, which is noted for its growth-oriented investing approach, with a focus on businesses that disrupt business paradigms as well as other players in this ecosystem.
Axis Special Situations Fund is advised by UK-based Schroder Investment Management and is the only programme in this category with significant international exposure. Axis Special Opportunities Fund was launched on 24 December 2020. The fund has produced a 9.88% CAGR (compounded annual growth rate) as on 10 January 2022, since inception.
SSF mutual funds are suited for those investors who have a high-risk appetite. It is important to note that at present in India there are only three SSF mutual funds. Further, unlike their western counterparts which invest in a limited number of companies going through special situations, these three funds have also invested in a lot of companies which are not going through any special situations. Thus, reducing the risk associated with these funds, however, this strategy also results in lower potential returns for these funds.
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Note: This story is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.