Opportunity Funds: Meaning, Returns, and Top Options

Opportunity funds have recently become quite popular in India as investors look for ways to diversify their portfolios and tap into high-growth potential companies. But what exactly are opportunity funds, how do they work, and what returns can you expect from them? This blog post will explore opportunity fund meaning, expected opportunity fund returns, and the various options available to investors in India.

What is an Opportunity Fund?

An opportunity fund is a mutual fund that invests predominantly in stocks of fast-growing small and mid-cap companies. The fund managers identify high-potential, relatively undervalued companies with strong future growth prospects. The focus is on capital appreciation rather than dividend payouts.

Unlike large-cap funds that invest in established blue-chip companies, opportunity funds take on relatively higher risks by investing in younger companies in niche segments with higher growth potential. The market capitalisation of stocks in an opportunity fund portfolio tends to be below ₹ 20,000 crores.

Some key features of opportunity funds include the following:

• Investments are focused on emerging high-growth companies.
• Concentrated portfolio of 20-30 stocks.
• Aims to benefit from future appreciation in stock prices.
• Moderately high to high-risk profile.
• Suitable for investors with a 5-7 year investment horizon.

Why Invest in Opportunity Funds?

Here are some of the main reasons why opportunity funds make sense for many investors in India:

1. Diversification

Opportunity funds provide exposure to small and mid-cap segments that feature young companies in sectors like technology, pharmaceuticals, automobiles, consumer goods, etc. This diversification into high-growth niches can help you balance your portfolio’s risks.

2. Growth Potential

Small and mid-cap companies often grow faster than large caps as they start from a smaller base, have agile operations, and are in emerging sectors. Opportunity funds aim to ride the growth trajectories of such businesses.

3. Long-Term Wealth Creation

Fund managers identify smaller companies that have the potential to become market leaders in their segments over the long term. By investing early, opportunity funds look to benefit from significant wealth creation over 5-7 years.

4. Experienced Fund Management

These funds are managed by experienced professionals having the expertise to spot opportunities in lesser-known emerging companies before others take notice. They have the training and the experience to take advantage of information asymmetries.

What to Expect in Terms of Returns?

Opportunity funds have delivered strong returns in the 15-25% range over the past 5-10 years. However, investors should be aware that these returns come with higher volatility. Depending on overall market conditions, there can be periods of low or even negative opportunity fund return. However, over longer durations of 7-10 years, opportunity funds have proven to beat benchmark returns rather handsomely.

As per historical NAV data, some of the top-performing opportunity funds in India with their 10-year CAGR returns (approximate round figures) are:

• HDFC Midcap Opportunities Fund Direct (Growth) – 21%
• Axis Midcap Fund – 18%
• Kotak equity opportunities fund – 22%
• ICICI Prudential Midcap Fund – 17%
• Invesco India Midcap Fund – 18%

While opportunity funds carry a higher risk than large-cap funds, they can deliver inflation-beating returns over the long term and create significant wealth. However, investors should have an investment horizon of at least 5-7 years to ride out interim volatility.

Top Opportunity Fund Options to Consider

Here are some of the best-rated opportunity funds currently available that investors could consider investing in based on their risk appetite and preferences:

1. ICICI Prudential India Opportunities Fund

This ICICI India opportunities fund adopts a flexi-cap approach by investing across market capitalisations based on growth prospects. The concentrated 35-stock portfolio of the ICICI India opportunities fund has delivered approximately 29% annualised returns over the last five years. Top holdings are in the financials, consumer, IT, auto, and industrial sectors. The minimum SIP investment is ₹100.

2. Kotak Equity Opportunities Fund

With an AUM of ₹26,175 crores, this 25-year-old fund focuses on emerging mid-cap companies across sectors and market caps. Kotak equity opportunities fund holds around 50 top stocks with allocations in the industrial, technology, consumer discretionary, and financial services sectors. The fund has given a 22.50% CAGR return over the last five years.

3. Axis Midcap Fund

Axis Midcap Fund deploys a blend of top-down and bottom-up approaches for stock selection from the mid-cap category. It has beaten benchmark returns by investing in around 50 high-conviction stocks. The top sectors are industrial, technology, healthcare and consumer goods. 5-year CAGR is around 23%.

4. Canara Robeco Emerging Equities Fund

This multi-cap-oriented fund invests up to 40% of the funds in large caps besides mid and small-cap opportunities. It holds around 30-35 high-growth stocks across market caps and sectors. The fund has delivered 23% annualised returns over the past 5 years, making it a top-quartile performer.

5. HDFC Midcap Opportunities Fund Direct (Growth)

With assets under management of ₹77,683 crores, this is among the most significant funds focused on emerging mid-cap companies. True to its label, it invests predominantly in mid-caps with the flexibility to allocate 30% of the funds to large and small caps. In a sector-agnostic approach, the concentrated portfolio of 25-30 stocks has given approximately 30% CAGR returns over the past 5 years.

Conclusion

Opportunity funds offer a compelling proposition for investors aiming for long-term, market-beating returns while adding diversification to their portfolios. By investing in potential market leaders of tomorrow, they look to ride both earnings growth and valuation expansion in emerging companies.

Though past returns do not guarantee future performance, opportunity funds have proven to be wealth creators over 7-10 years. Investors comfortable with moderately high risks should consider allocating some of their equity investments into well-managed opportunity funds based on their risk appetite and investment horizon.

Frequently Asked Question – FAQs

1. How risky are opportunity funds compared to large-cap funds?

Opportunity funds carry a higher risk than large-cap funds as they invest predominantly in mid and small-cap stocks, which tend to be more volatile. However, over long durations of 7-10 years, opportunity funds have delivered higher returns.

2. What is the ideal investment horizon for opportunity funds?

You should stay invested in opportunity funds for at least 5-7 years to benefit from the high growth potential of emerging companies in the portfolio. Shorter durations may lead to interim losses due to volatility.

3. How often should one review an opportunity fund investment?

Review the performance of your opportunity fund at least once a year or when there is a major change in the fund manager. Tracking quarterly performance is not advisable due to the higher volatility.

4. How risky are opportunity funds compared to large-cap funds?

Opportunity funds carry higher risk than large-cap funds as they invest predominantly in mid-and small-cap stocks, which tend to be more volatile. However, over long durations of 7-10 years, opportunity funds have delivered higher returns.

5. What is the ideal investment horizon for opportunity funds?

You should stay invested in opportunity funds for at least 5-7 years to benefit from the high growth potential of emerging companies in the portfolio. Shorter durations may lead to interim losses due to volatility.

6. How often should one review an opportunity fund investment?

Review the performance of your opportunity fund at least once a year or when there is a major change in the fund manager. Tracking quarterly performance is not advisable due to the higher volatility.

Author: All Content is verified by SMC Global Securities.