What Is an Opportunity Fund?
Opportunity funds are a type of mutual fund consisting of a portfolio of companies’ stocks that offer a high growth potential. These are actively managed and they aim to deliver returns that can maximise the wealth of the investors. The fund managers continuously seek companies for their portfolio by carrying out in-depth market analysis and research. The research may be done based on a stock, industry, sector or thematically.
As the government regulations, policies and trade agreements of the country change, the change gives rise to new opportunities. As these opportunities can arise across various investment avenues, sectors, themes etc., the managers are granted the freedom to adjust the portfolios accordingly. This makes the opportunity fund highly flexible.
Furthermore, the portfolio undergoes dynamic changes as the trend changes. For example, the IT sector may experience growth in one year and the health sector in the succeeding year. In such cases, the portfolio may change in composition with the IT sector dominating in one year and the health sector dominating the portfolio in the next. This is done because the final goal of this fund is to help the investor maximise their wealth.
Features of Opportunity Funds
The key features of opportunity funds are as follows:
- Flexibility: The fund managers of opportunity funds are not restrained by traditional asset allocation models. These funds allow the managers to choose stocks across various sectors as well as companies with different market caps. To achieve this, the fund managers are continuously engaged in market research and analysis. Moreover, by choosing various sectors, a fund manager can also choose to diversify the portfolio depending on the current market conditions.
- Concentrated portfolio: For a specific period of time, the portfolio of opportunity funds locks in a specific group of stocks that are estimated to outperform the market. This time period can range from short to medium term, depending on the changes in various factors such as economic policies, reforms, market trends etc.
- High reward high risk: These investment avenues carry the potential for higher returns than the market. However, they also carry higher risks. These funds can be volatile as they invest in the companies that are estimated to carry growth potential by the fund managers. However, if the assumptions prove to be false and the external circumstances do not favour a specific sector or theme, it can deteriorate the performance of the fund.
- High portfolio turnover ratio: The fund managers adjust the portfolios according to the changing market conditions. This allows the opportunity funds to yield a high turnover. The underperforming stocks are swiftly replaced by the stocks that are performing well in the market. This process is perpetual and the funds create capital appreciation when the right decisions outweigh the wrong ones.
- Undervalued assets: Opportunity funds can also target investments in areas with the potential for above-average returns. This strategy involves choosing stocks that are underappreciated by the market. The difference in intrinsic value and market value may arise due to current market conditions that may change in the future. By estimating future trends, the managers are able to pick the stocks with the higher yield potential.
How Do Opportunity Funds Work?
With changes in sector trends, economic reforms and policies, retail behaviour, global market, technological changes, etc., new opportunities arise across various sectors and themes. Using their analytical skills, the fund managers target the stocks that can prove to be profitable for the investors. For instance, with the rising demand for renewable energy, fund managers can assume that stocks of companies that deal in products such as electric vehicles, solar panels, etc. have high growth potential, thereby including them in the portfolio.
The portfolio is not restricted to equity stocks. The potential can be explored across various asset classes available in the market. For example, if there is potential for high returns in the debt securities compared to the current market condition, the fund manager might include bonds in the portfolio that can outperform the market.
Thus, by creating and actively maintaining a portfolio, the fund managers try to maximise the wealth of their investors through opportunity funds.
Should You Invest in an Opportunity Fund?
Investing decisions are subjective to the investor depending upon their goals, risk tolerance, investment horizon etc. The following are some of the key points to consider before committing your money to the opportunity funds:
- If you have a higher risk tolerance, these funds can be an optimum investment for you. The market is complex and ever-changing which makes these investments highly volatile because fund managers can make an error while choosing stocks for the portfolio.
- The perpetual process of research can be costly to the fund owners. Hence, before investing, it is important to assess the expense ratio.
- These funds require a longer investment horizon to yield returns. So, if you are looking for an investment avenue for your short-term goals, opportunities funds might not be the optimal investment for you.
- As the portfolio is unrestricted, the investor can get exposure to various investment avenues across the market.
Considering the above points and evaluating various other factors such as willingness to depend on the management, liquidity of the funds etc., you can decide whether opportunity funds align with your financial goals or not.
Conclusion
Making investment decisions can be difficult as there are no set of rules for investing. Hence, it is important to take time and evaluate your goals and select the investment avenues that align with your goals. Opportunity funds offer a unique investment option for those seeking exposure to potentially high-growth assets and have a high-risk tolerance. However, it is important to evaluate the risk against the potential rewards before investing in these funds.
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FAQs
Is there risk associated with opportunity funds?
Yes, opportunity funds carry higher risks due to their volatile nature and the potential for fund managers to misjudge market trends or specific sectors. These funds are suitable for investors with a higher risk tolerance.
What returns can I expect from opportunity funds?
Opportunity funds can offer higher returns than traditional investments if the chosen sectors and stocks perform well, but these returns are not guaranteed and depend on market conditions and the skills of the fund managers.
How long should I invest in opportunity funds for optimal results?
Opportunity funds typically require a longer investment horizon to maximise returns, as they need time to capitalise on market changes and trends.
Can opportunity funds invest in assets other than stocks?
Yes, opportunity funds can invest in a variety of asset classes, including bonds and other securities, if these are deemed to have the potential for high returns compared to the current market conditions.
How do opportunity funds adjust to market changes?
Fund managers of opportunity funds actively analyse and adjust the portfolio, swiftly replacing underperforming stocks with those showing better performance in response to changing market conditions and trends.
