Complete Guide to Opportunity Funds: Features and How They Work

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Synopsis:

Opportunity funds focus on those sectors, stocks, and themes, which can provide a high return in the short to medium run. As opposed to other mutual funds which are sector-specific or theme-specific, opportunity funds can invest in any sector or any theme, provided it has an opportunity

Opportunity funds invest in those companies, sectors, or themes, where they expect high growth. In simple words, such funds invest money where they see a huge opportunity for growth.

If you have just opened your demat account, you should learn about opportunity funds because they can help you generate a significant return on your portfolio. This blog will explain all the features of opportunity funds and how they work.

Key Features of Opportunity Funds and How they Work

  • Sole focus on opportunities: The reason these funds are called opportunity funds is that they solely focus on opportunities. Whether they see an opportunity in a stock, in a theme, in a sector, or anywhere else, they invest in it, provided they think it is indeed a genuine opportunity. It is quite different from other mutual funds, which typically tend to be theme-specific or sector-specific. For example, a large-cap mutual fund will only invest in large-cap stocks. But an opportunity fund’s portfolio can comprise large-cap, mid-cap, and even small-cap stocks, provided it sees an opportunity in them. As such funds are not bound by a specific sector, they can invest in one sector in one year and another sector in the next year. For example, if an opportunity fund thinks that IT stocks offer growth potential this year and telecom stocks will offer growth next year, then it can swiftly move from IT to telecom in a year.

  • Opportunities can be due to trade agreements, government regulations, or even policies: Such funds can invest even in those opportunities that are due to trade agreements, government regulations, or even policies. For example, if the government decides to implement a policy that gives a boost to housing, then such a fund may decide to invest in housing finance stocks. This is where such funds are different from other mutual funds because the mandate of those funds does not allow them to invest in a stock because of some changes in government policies or trade agreements.

  • High turnover ratio: Opportunity funds typically have a high turnover ratio. This means their manager moves from one stock to another stock often in a short period of time. Therefore, they buy and sell stocks faster than other funds do. In fact, an opportunity fund manager is very keen to find stocks that can provide good returns in the short or medium run. Compared to this, other mutual funds often hold onto a stock for the long term if they see a growth potential. As already discussed, opportunity funds are solely focused on opportunities to make money. As soon as those opportunities are exploited, they move on to another stock.

  • Such funds can be risky: As opportunity funds try to find maximum growth potential in a highly volatile market, they can be risky. They even have a high turnover ratio. Such features indicate that investments in such funds can be very risky at times, although such investments can also offer a high growth potential. Therefore, unless you are willing to bear a reasonably high level of risk, you should not invest in such funds.

  • Can invest in equities and debt both: An opportunity fund’s portfolio can have both equities and debt. Typically, the manager of an opportunity fund finds sectors, which can provide high growth. Investments in such sectors fall within the purview of equity investments. However, if the manager thinks that he can generate a high return from debt investments, then he can invest in debt instruments as well.

Conclusion

As an investor, you must be wondering whether opportunity funds are for you or not. While such funds offer growth opportunities across sectors and themes, they can be quite risky because their managers have to consistently find opportunities. This requires them to move from one stock to another stock quite frequently, making the investments risky.

Besides, if the investments of an opportunity fund depend a lot on government policies, then also such funds can be risky because policies can change from time to time. And, it may not be possible for a manager to time his investments in a manner that they are not affected by a policy change. So, as an investor, you should carefully analyse the risk and rewards of an opportunity fund before investing.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

For All Disclaimers Click Here: https://bit.ly/3Tcsfuc

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