What is a Special situation fund


A special situation fund is a thematic fund like no other.

A thematic mutual fund like the name suggests invests in a particular theme.

An infrastructure themed mutual fund would invest in companies related to the infrastructure theme like say paints (chemicals), cements, steel, etc.

A sectoral mutual fund would invest in companies related a particular sector, like say a pharmaceutical fund would only invest in pharmaceutical companies.

A Special situation fund despite being a thematic fund is neither like the two because it is not restricted by either a particular sector or theme.

It can invest across all sectors and caps.

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 What are special situation funds?

A special situation fund is a mutual fund scheme that seeks to take advantage of opportunities presented by unique situations or challenges a sector, business or overall economy may face.

These unique situations are rare and come with a limited shelf life as far as an attractive valuation is concerned.

Equity investing is more about the valuation rather than the price.

A special situation fund attempts to benefit from this drop in price which as mentioned above may have a very limited shelf life.

Unlike other mutual funds, a special situation fund is on the lookout for such events and therefore finds it easier to capitalize on such events as opposed to other mutual funds who are not.

When you seek opportunities, you find opportunities and when you seek hurdles, you find hurdles.


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What are special situations?

Special situations could mean any of the following but not restricted to these:

Company Events

This could be related to:

  1. A whistleblower incident
  2. Corruption or bribery charges
  3. Any fine by the respective authorities
  4. Change in management


Industry events

This could be related to:

Any new regulatory changes affecting how the business is run.

For example A chemical plant being examined on higher levels of testing standards or government restricting export of a particular product.

A new entrant or an existing participant bringing about a new product that disrupts the entire industry.

For example Zomato and Swiggy changed the way people order their food in.


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Macro-Economic events

This could be related to:

Inflation, a higher inflation rate could affect the prices of anything that is consumption driven but is discretionary.

Let’s say that retail inflation affects prices of vegetables which in turn affects the prices of snacks which is consumption driven but at the same time discretionary, meaning something that can be ignored if necessary.

This would affect sales which would then in turn also reflect in the company share price.

This could be a temporary phase for both the company and also its share price thereby allowing the fund manager a very attractive time to enter the stock.


Regulatory changes

Let’s say India has had a poor monsoon which in turn affected harvests.

To overcome the shortfalls, the government bans export of tomatoes.

This would adversely affect companies that produce and export tomato related food products.

This would affect the company’s numbers both due to a prohibition on sales as well as if the exchange rates were in their favour.


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Understanding Special situations

Special situations with regards to effect can be divided into

  1. Short term
  2. Medium term
  3. Long Term


Short term

If the CEO of a company resigns then this could and in most cases does reflect negatively in the company’s share price as well.

This should however not always show the company in a bad picture but that’s how the markets function.

The CEO could have resigned due to personal reasons and despite that the share prices took a tumble.

This is what you call a short term disruption allowing the fund managers to enter the stock at an attractive valuation.


Medium Term

In November 2016, the government of India announced demonetisation of currency notes of valuation Rs 500 and 1,000.

Ever since then online payment apps and softwares supporting them have seen a rise in their business.

Cash in circulation by 2019 was still at the same levels as around the time of demonetisation but at least for that specific period in between, the immediate months after the announcement in particular did see a spike in online payments as opposed to cash payments.


Long Term

On September 20, 2019 the Government of India announced a tax cut to Corporate tax from 30% to 22% and from 25% to 15% for new manufacturing companies.

This was intended with the purpose to encourage more investments and growth.

The real effect of this would be seen in the long run and not immediately.


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Disruptions creating special situations

Disruptions could be man-made like say:

  1. Change in government, political policies
  2. Wars etc.
  3. Economic policy changes like new or additional tariffs


Natural like say:

  1. Floods
  2. Climate change
  3. Earthquake etc.


Disruption of any type affects the overall economy in general and certain sectors more specifically.

Disruptions are usually immediate but the after effects of it could range from short term to long term.


The Coronavirus Disruption

Coronavirus not just affected the health of people worldwide but also the economy and thereby the global stock markets too.

Markets all over the world took a tumble and all stocks, including the ones with strong fundamentals took a nosedive.

Companies of all categories and market size underwent a severe correction.

This provided fund managers with plenty of opportunities to enter into companies with strong fundamentals at very attractive valuations.

Companies related to the healthcare and IT sector with minimum to no debt which were previously not looked at due to their high prices were now available at a massive discount.

In a similar manner the new work from home schedule meant a change in lifestyle which accelerated digital revolution and brought telecom stocks into demand.


A special situations mutual fund is built and run around:

  1. Understanding current events
  2. Looking for opportunities in disruptions
  3. Predicting future events
  4. Understanding changing human behaviour
  5. Going beyond the numbers.


For a special situations mutual fund to be successful it not only needs to be really good at those above points but also needs to take those crucial calls within the limited time period, timing is of paramount importance with this fund.



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