Ways To Invest During Special Situations

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Ways To Invest During Special Situations
Suresh Sharma & Vishal Mahajn Partners, Sixth Element Capital
OLM Desk - 01 April 2022

The ongoing global conflicts and the pandemic have wreaked havoc across the world and have affected each one of us in many several ways. In addition to the enormous loss of life and livelihood, the calamities have had other more insidious effects, including a sharp surge in crude oil prices, along with a plunge in stock prices. As the world eagerly awaits a solution to this ongoing crisis, people are wondering how they can safeguard their future and wealth.

During unexpected scenarios, it is imperative that along with helping those in need, one should also focus on building a nest egg which can stand in good stead during times of crisis such as these. This is where mutual fund investing for special situations comes in.

While emotions might dictate that you should keep miles away from riskier assets like stocks, and turn towards safe havens like gold and silver, it is important to not give in to fear. You must look towards strategic opportunities in equity, as it could potentially help you turn a crisis into an opportunity for long-term wealth creation.

India is a country with a horde of fundamentally strong companies, and at any given time, some of them may be facing turbulence or going through temporary downturns. These temporary challenges act as special situations that can become inflection points for the company.

Potential Opportunities

What are some of the situations which can be turned into opportunities? Special situations arising out of a temporary crisis in the company, sector, economy, or government actions, regulatory policies, global events or uncertainties—all these can be considered as opportunities. History indicates that the best of sectors, from automobile to real estate and telecom, have gone through their fair share of trouble, only to emerge stronger in the long run. In addition to the ongoing sector issues, we are also faced with the broader macro challenges of high crude oil prices, new Covid-19 variants, rising interest rates, and supply chain bottlenecks and shortages.

These situations present an investment opportunity to a fund manager who can interpret the implications of that opportunity. This style of investing is a bottom-up stock picking style because the core of its investment strategy is identifying companies in special situations. This requires rigorous, 360-degree stock research, something best left to the experts. We have to be savvy enough to differentiate between uncertainty and risk, and know which side to pick.

Getting The Most Out Of Uncertainty

Most investors prefer investing after they have achieved some clarity over how events pan out. However, history is proof that greater uncertainty can lead to higher rewards. In line with this view, and with the vision of offering investors an opportunity to make the most of the uncertain times, several fund houses are offering special situation-based mutual fund offering.

These funds aim to generate long-term capital appreciation by investing in opportunities presented by special situations, such as corporate restructuring, government policy and/or regulatory changes, companies going through temporary unique challenges, and other similar instances.

As an investor, it is important to understand that a special situation can arise at any point in time for a company. So, to capture such opportunities, as an investor, it is better to take a staggered approach to investing in such a fund through systematic investment plan (SIP) with a long-term view. In this way, an investor can maintain a disciplined and regular way of investing, which ultimately will aid in the investment generating relatively better returns. Another aspect an investor should be mindful of should be to remain invested in such funds for at least three-to-five years, such that the turnaround stories can play out.

So, while there is generally a great deal of fear and risk associated with uncertainty, investors should realise that uncertainty is often temporary, and those who can optimally identify the opportunity in uncertainty, stand to benefit over the long term.

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