L&T India Special Situations Fund seeks to invest in stocks that are out of favour, undervalued, or in special situations such as mergers, turnaround and takeovers. The fund’s mandate is to spot stocks that are unjustly beaten down in special situations and to buy them, as they bounce back over the long term.

Such an approach pegs up the risk a bit. It also implies that one may have to have a longer investment horizon of, say, three to five years to earn reasonable returns from this fund.

If this approach suits you, you can invest in this fund given its impressive track record.

Its five-year return of 13.7 per cent is on par with multi-cap funds such as Franklin Flexi-cap and is higher than that of its peer, Birla Sun Life Special Situations.

Fund strategy

Given its mandate, the fund follows a multi-cap approach, with exposure to mid- and small-cap stocks ranging between 20 and 40 per cent.

It is not the one to take to cash or debt holdings when markets seem iffy. While these strategies imply a slightly aggressive stance, this is balanced out by the fund’s ability to alter these allocations in accordance with the market direction. For instance, in the 2012 rally, the fund gained by increasing mid-cap holdings of up to 40 per cent of its equity portfolio.

On the other hand, in the current volatility, the fund has about 80 per cent of its investments in large-caps, mitigating the risk.

Cautious stance

A nose for opportunity has seen it buy Nestle this June, after the stock dropped to its one-year low of ₹5,499 due to the Maggi controversy. The stock has since bounced back sharply. Another stock in the FMCG space, Emami, has been part of the portfolio since September 2013. In this period, Emami has taken the inorganic route to growth, acquiring at least three companies. The stock price too has moved from the levels of ₹430 then to around ₹1,200 now.

While it bought Ranbaxy just ahead of the announcement of the merger with Sun Pharma in early 2014, MCX was added to the portfolio in February 2015. MCX, with a lion’s share of the commodity derivatives market, is expected to be a major beneficiary of the upcoming SEBI-FMC merger. Future Retail has also been in its portfolio for a long time, seeing through the Pantaloon sell-off and the more recent merger with Bharti Retail.

With Future Retail now hoping to unlock value for its supply chain business through an IPO, it makes sense for the fund to continue holding the stock. While it rode on the cyclical banking stocks in the 2014 rally, along with cement stocks, it has now cut down on its holdings in both these sectors. Consumer non-durable holdings have been upped in the last few months after a hiatus in 2014, suggesting that the fund takes a cautious view on markets.

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