Contra Funds

As mentioned above, contra funds predominantly invest in equities, but with a twist. The managers of these funds allocate the money you invest in the company stock that is undervalued.

 

These companies generally have robust financial credentials but have recently taken a hit due to some negative development. Fund managers wait for these companies to come out of this setback in the short term and make high returns in the long run.

 

If you wish to park your money for a longer tenor, contra funds may be the right choice for you. These funds adopt a value-investing strategy, which only pays off high returns when you make a long-term investment.

 

Moreover, as these companies take time to recover from the blow that they have taken, it may involve higher risk as compared to other funds. So, you must be ready to bear a higher level of risk if you have decided to invest in these funds.

The following are some of the key features of the contra mutual funds:

 

• These funds follow a unique investment strategy called value investing, where money is allocated to company stocks that are undervalued

• These investments are made for the long term as they do not yield noticeable returns in shorter periods

• There are only three contra funds available to investors in India: SBI Contra Fund, Kotak India EQ Contra Fund, and Invesco India Contra Fund

• As per the SEBI rules, an AMC can either offer contra fund or value fund to its investors and cannot offer both at once

If you decide to invest in a contra fund, the following are the benefits that you get to enjoy:

 

• Potentially Higher Returns

   

These funds employ a contrarian strategy that involves investing in often overlooked and undervalued stocks. If calibrated well, this strategy can pay off higher returns compared to other equity-dominated mutual funds.

 

• Lesser Impact of Institutional Investors

   

These funds generally focus on those companies that often do not attract traction from many investors. Due to this underlying factor, the impact of institutional investors on the price movement of such stocks is quite low.

 

• Good Bargaining Opportunity

   

Fund managers of these funds generally buy stocks of a company when they are undervalued. This enables them to pull off a good bargain and purchase stocks at a favourable net asset value (NAV).

 

• Holds Value in Times of Prolonged Market Downslide

   

Usually, the value of high-beta stocks suffers the most when there is a prolonged downturn in the market. In situations like these, the value of contra funds remains more or less stable as compared to highly-priced stocks.

 

• Inherent Pen-up Value 

   

A pent-up value is inherent in stocks included in the contra funds. However, this value is not reflected because of certain issues. Once these issues are resolved, these stock prices generally witness a surge.

To make an informed decision about which contra mutual fund to choose, you must consider the following factors: 

 

• Risk Tolerance

   

There is no certainty that stocks included in the funds perform just in the manner the fund manager predicted. There can be times when this approach does not materialise, and you may have to bear losses. In a way, contra funds involve an ‘opposite to the trend’ strategy, which is why the associated risk is also higher. 

 

• Investment Tenor

   

Contra funds provide higher returns only if you have invested in them for a longer tenor. To realise excellent returns, you need to stay invested in the scheme for at least 5 years, or more in some cases. However, since these are equities, longer timelines have the potential to generate truly remarkable returns. 

 

If you have decided to invest in contra funds, you can do so quickly on Bajaj Markets. It allows you to start investing in more than 1,100 direct mutual fund plans with as little as ₹100. 

 

However, whether you invest in contra or any other mutual fund schemes, it is important to note that these schemes are linked with market fluctuations. Hence, the returns on contra funds are not always guaranteed. 

 

This is why it is prudent to conduct thorough research before you invest in any funds. This would allow you to choose a fund that may have a higher probability of earning you more optimal returns.