What are Contra Mutual Funds?
Contra funds are a distinct type of mutual fund that aim to outperform the market by going against current trends. They focus on investing in assets that are currently underperforming or undervalued, with the goal of achieving higher returns.
These funds use a strategy of selecting undervalued stocks with strong fundamentals that are not favoured by the market at the moment. By purchasing these stocks at lower prices, contra funds stand to gain from any significant price increases, which often occur during bullish market phases.
These funds use a strategy of selecting undervalued stocks with strong fundamentals that are not favoured by the market at the moment. By purchasing these stocks at lower prices, contra funds stand to gain from any significant price increases, which often occur during bullish market phases.
How Do Contra Funds Work?
Contra mutual funds are a type of equity-oriented fund that primarily invests in the equities of various companies. They are termed “contra funds” because their investment approach is largely contrarian, meaning they invest in a manner that goes against prevailing market trends. These funds focus on stocks that are not currently favored in the market. The strategy is based on the belief that purchasing these undervalued stocks at a lower price could result in significant returns if their prices surge in the future, particularly when the market shifts to a bullish phase. As per SEBI (Securities and Exchange Board of India) regulations, contra funds are required to allocate at least 65% of their total capital to equities.
List of Contra Funds:
Several contra funds have demonstrated their ability to outperform the market over the long term like:
- SBI Contra Fund: Managed by State Bank of India, this fund focuses on undervalued stocks across various sectors.
- Invesco India Contra Fund: This fund targets out-of-favor companies with strong fundamentals and turnaround potential.
- Kotak India EQ Contra Fund: This fund invests in undervalued or out-of-favor stocks to generate long-term capital appreciation.
Performance of a Monthly SIP of ₹10,000 for 5 years
SBI Contra Fund generated an XIRR of 36.97% over the past 5 years
Kotak Contra Fund generated an XIRR of 30.82% over the past 5 years
Invesco Contra Fund generated an XIRR of 29.30% over the past 5 years
Features of Contra Funds
Contra funds present a higher risk-reward profile because they invest in companies with untapped potential. Fund managers conduct thorough evaluations to identify companies with the most promising growth opportunities.
These funds are required to allocate a minimum of 65% of their assets to equity-linked instruments and equity derivatives. This allocation underscores the fund’s focus on capitalizing on equity growth prospects.
Why Should You Invest in a Contra Mutual Fund?
Despite the associated risks, contra mutual funds offer several potential benefits:
High Returns: Contrarian investing in undervalued stocks can yield significant returns when those stocks rebound. Long-Term Growth: Contra mutual funds are well-suited for long-term investors seeking value that may take time to materialize. Diversification: These funds can enhance portfolio diversification, particularly if the rest of the portfolio consists of more conventional assets.
Factors to Consider Before Investing in Contra Mutual Funds
Before deciding to invest in a contra mutual fund, it’s important to review the historical performance of the funds you’re considering. However, several other factors also warrant careful consideration:
1. Market Independence:
In contrarian investing, the overall market performance may not directly impact the stocks you invest in. In a contra mutual fund, the performance of individual stocks is more significant. Therefore, it’s crucial to evaluate the equities within the fund, paying close attention to the companies’ fundamentals and their potential for future growth.
2. Risk Considerations:
Like all mutual funds, contra funds carry risks. Investing in undervalued stocks can involve significant uncertainties. Due to these risks, it might be wise to allocate only a small portion of your portfolio to contra funds.
3. Importance of the Fund Manager:
The success of a contra fund heavily relies on the expertise of the fund manager, as the selection of stocks is based on their long-term growth assessment. Researching the track record and investment style of the fund manager is advisable before committing to a contra fund.
4. Aligning with Personal Investment Goals:
Before investing in a contra fund, consider your own risk tolerance, investment horizon, financial needs, and overall investment objectives. The key is to ensure that the investment aligns with your personal strategy and is likely to deliver the desired returns within your specific time frame.
In contrarian investing, the overall market performance may not directly impact the stocks you invest in. In a contra mutual fund, the performance of individual stocks is more significant. Therefore, it’s crucial to evaluate the equities within the fund, paying close attention to the companies’ fundamentals and their potential for future growth.
2. Risk Considerations:
Like all mutual funds, contra funds carry risks. Investing in undervalued stocks can involve significant uncertainties. Due to these risks, it might be wise to allocate only a small portion of your portfolio to contra funds.
3. Importance of the Fund Manager:
The success of a contra fund heavily relies on the expertise of the fund manager, as the selection of stocks is based on their long-term growth assessment. Researching the track record and investment style of the fund manager is advisable before committing to a contra fund.
4. Aligning with Personal Investment Goals:
Before investing in a contra fund, consider your own risk tolerance, investment horizon, financial needs, and overall investment objectives. The key is to ensure that the investment aligns with your personal strategy and is likely to deliver the desired returns within your specific time frame.
FAQs on Contra Mutual Funds
Q1. What is a Contra Fund?
A Contra Fund is a type of mutual fund that adopts a contrarian investment strategy by investing in stocks that are currently undervalued or out of favor with the market, rather than following popular, well-performing stocks.
Q2. Who should consider investing in Contra Funds?
Contra Funds are ideal for investors who have a higher risk tolerance and are willing to invest for the long term to potentially benefit from market corrections.
Q3. Are Contra Funds risky investments?
Yes, Contra Funds are generally considered high-risk. They focus on investing in underperforming sectors or stocks, which might have strong growth potential but come with greater uncertainty.
Q4. What are the potential rewards of investing in Contra Funds?
While they carry higher risks, Contra Funds can offer substantial returns over the long term, particularly when the undervalued stocks in the portfolio recover.
Q5. How do Contra Funds diversify a portfolio?
By investing in out-of-favor stocks and sectors, Contra Funds can add a unique layer of diversification to a portfolio, complementing more traditional investments.
Q6. What is the typical investment strategy of Contra Funds?
Contra Funds typically go against prevailing market trends, investing in stocks or sectors that are currently underperforming but are expected to rebound in the future.
A Contra Fund is a type of mutual fund that adopts a contrarian investment strategy by investing in stocks that are currently undervalued or out of favor with the market, rather than following popular, well-performing stocks.
Q2. Who should consider investing in Contra Funds?
Contra Funds are ideal for investors who have a higher risk tolerance and are willing to invest for the long term to potentially benefit from market corrections.
Q3. Are Contra Funds risky investments?
Yes, Contra Funds are generally considered high-risk. They focus on investing in underperforming sectors or stocks, which might have strong growth potential but come with greater uncertainty.
Q4. What are the potential rewards of investing in Contra Funds?
While they carry higher risks, Contra Funds can offer substantial returns over the long term, particularly when the undervalued stocks in the portfolio recover.
Q5. How do Contra Funds diversify a portfolio?
By investing in out-of-favor stocks and sectors, Contra Funds can add a unique layer of diversification to a portfolio, complementing more traditional investments.
Q6. What is the typical investment strategy of Contra Funds?
Contra Funds typically go against prevailing market trends, investing in stocks or sectors that are currently underperforming but are expected to rebound in the future.