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Aditya Birla Sun Life mutual fund is bringing one new scheme, called Aditya Birla Sun Life Special Opportunities (ABSO). ABSO is a thematic equity fund. It aims to invest in companies that are most likely to benefit from certain specific special situations. The new fund offer period closes on 19th October 2020, after which it becomes an open-ended scheme.
Companies that fall in the special situations category are most likely available at prices which do not reflect their true potential or value. The fund manager takes advantage by investing in these companies and waits for the value to be unlocked and the share price to march upwards when that happens.
Funds that pick stocks based on special situations criteria typically buy shares before their full potential is realised. They are usually available at rock-bottom prices. On paper therefore, they can experience big gains when the companies values get unlocked. On the other hand, plain-vanilla diversified equity funds may also pick stocks that would have already appreciated quite a bit.
ABSO can also allocate up to 25% of its corpus to foreign securities, of course, pertaining to special situations. but being thematic fund, it comes with higher risk than a plain-vanilla equity scheme. It also depends on how well the fund manager identifies the special situations that companies could benefit from.
Thematic schemes also have far fewer stocks than plain-vanilla funds. Concentration is not necessarily unfavourable, but it just increases your risk levels. ABSO will hold 35-40 stocks in its portfolio, which means a bit more diversified portfolio. But concentration in the top few holdings could result in lumpy returns during certain periods.
Securities and Exchange Board of India (SEBI) issued its new categorisation norms in 2017 and nudged the industry to consolidate its schemes. There were about 13 equity funds that were either called ‘opportunity’ or ‘special situations’, but followed almost the same path as ABSO is expected to. Many among that lot had concentrated sectoral exposures and churned frequently. Some had even done well over time. But many such funds were also inconsistent.