There are many kinds of mutual funds, but one is unique, called a “contra fund.” The way of investment adopted by a contra fund is adversary, as it invests in unpopular stocks so that the same performs well in the future. Specialising in companies with low price tags or those overlooked by the market, contra funds target long-term growth when the market finally catches up to determine the undervalued stocks.
This article encompasses understanding what is Contra fund, its meaning, working mechanism, and which benefits and risks it invites while also listing some of the best contra funds in India.
What is Contra Fund?
A contra fund is a mutual fund that takes a contrarian investment approach. It invests in stocks that are currently underperforming or unpopular in the market. The managers believe that such companies have good fundamentals but are undervalued because of some temporary factors. Therefore, they expect stocks to recover and gain significantly in the long term.
In contradiction to the general market trend, this fund allow investors to purchase stocks at relatively low prices and gain when those stocks rise in value. Contrarian investment requires complete analysis, a long-term perspective, and patience.
Contra Fund Meaning
WHY SMC
- 20 Lac+ unique clients
- 33+ Years of Serving
- Advance Technical Analysis
- Free Demat Account
Contra fund means that when most investors shy away from the stocks due to their worst performance, contra funds consider it an opportunity because they invest in those very ignored or undervalued stocks with the hope that the facts about them will probably be realised later. In other words, this funds presumes that the market sentiment about particular firms is deplorably pessimistic, and, thus, those firms would recover, offering beautiful returns to the early investor.
Characteristics of Contra Mutual Funds
Contra mutual funds have several defining characteristics:
1. Contrarian Strategy:
The foremost characteristic of a contra fund is that it pursues a contrarian strategy in investment. The fund managers will look for companies or sectors that the general market currently dislikes but have good prospects for long-term growth.
2. Long-Term Investment:
Even though investors in mutual funds are expected to be long-term investors, the investment horizon required by a contra-mutual fund would be much longer because the turnaround in the performance of the stock may take several years.
3. Equity-Oriented:
A contra fund usually holds a significant portion of its assets in equities, often about 65% or more, with an emphasis on undervalued stocks currently.
How Do Contra Funds Work?
There is the process of purchasing stocks that the market generally ignored or undervalued. This could contradict most mutual funds because they may invest in high-performing or popular stocks. Unlike typical mutual funds, the fund managers of contra-mutual funds look for companies that are fundamentally sound but happen to be facing short-term difficulties at the moment.
Such short-term challenges might be based on economic conditions, changing consumer behaviour, or unfavourable market sentiments.
After purchasing the stocks, the fund waits for the market to correct. The company’s fundamentals are sound, and the market will eventually realise its value and raise the stock price. During that time, contra funds can wholly leverage the price appreciation.
Advantages of Contra Funds Investment
There are numerous benefits of investment in contra mutual funds:
1. Huge returns:
Potential Undervalued stocks are investment opportunities because they likely may return a good amount of money in future when the market correctly perceives them.
2. Diversification:
A contra fund represents, for a portfolio, an investment in those stocks about which most investors would lack the interest to learn anything. Thus, the potential risk of a portfolio that is otherwise overly concentrated in popular and mainstream investments is reduced.
3. Less Attraction:
Since contra funds focus on low-liquidity stocks, they attract very few institutional investors. This reduces the short-term fluctuations of such shares in the market.
Best Contra Funds in India
When choosing the best contra funds in India, several factors can be used to decide. They include the performance of the fund and the expense ratio. Also important is the track record of the fund manager. Below are the top contra funds in India:
1. SBI Contra Fund
- Assets under management,
- AUM: ₹26,776.87 crore
- Expense ratio: 0.63%
- 5-year CAGR: 28.64%
2. Invesco India Contra Fund
- AUM: ₹13,903.49 crore
- Expense Ratio: 0.54%
- 5 Year CAGR: 21.76%
3. Kotak India EQ Contra Fund
- AUM: ₹2,961.62 crore
- ERP: 0.61%
- 5-Year CAGR: 22.98%
4. L&T Contra Fund
- AUM: ₹2,412 crore
- Expense Ratio: 0.90%
- 5-Year CAGR: 20.50%
These are few of the best performing funds with a contra strategy. Such funds have performed well over the period and are appreciated in the market. Investors should certainly do their research or seek help from a financial advisor before investing in these funds.
WHY SMC
- 20 Lac+ unique clients
- 33+ Years of Serving
- Advance Technical Analysis
- Free Demat Account
Which is the Best Contra Fund?
If you are looking to invest in contra funds, here are some things you should look into:
1. Previous Performance:
Analyse how the fund has performed previously and how it compares to its benchmark. It doesn’t guarantee the possible future returns but gives one an idea of how it has behaved with changing market conditions.
2. Expertise of the Fund Manager:
There is an articulation of reliance by contra funds on the experience and expertise of the fund manager. A fund managed by someone with a proven record will be able to offer more confidence to investors.
3. Expense Ratio:
An expense ratio, or an expense fee, signifies the amount of fees imposed by the fund for managing investments. In general, lower expense ratios are preferable as they leave room for returns.
4. Time Horizon:
The contra mutual fund is a long-term investment vehicle. Make sure that your investment goal is also in the long term for you to get the most out of this mutual fund.
5. Risk Appetite:
Since the contra fund is highly susceptible to market shocks, it would appeal only to those investors who can stomach higher risks. You will not sleep well because of market commotion if you are not risk-tolerant.
Conclusion
In summary, people have to learn about the concept of what is contra fund so that they can save their money diversely in an investment that may turn out to be a little different and, thus, rewarding. This is a type of mutual fund that invests in stocks that are undervalued and temporarily not in favour of the market, with the hope of earning long-term growth when their stocks rebound. A slight risk is involved, like market volatility and a lengthy recovery period, but this type of fund creates fair returns for those who can patiently wait for the approach to be contrarian.
If you want professional advice regarding choosing the right contra fund or any other investment options, consult SMC Global Securities, a reputable financial services company.
FAQS
1. What is contra fund?
A contra fund meaning is one type of mutual fund classification that invests in those stocks that are underperforming or on the list of not-popular stocks in the market. According to the fund’s managers, these companies have excellent fundamentals. Still, they are undervalued for some momentary reasons, and therefore, they expect the stock to bounce back strongly in the long run.
2. How do contra funds work?
Contra funds work by purchasing stocks that the market has largely ignored or undervalued. The fund managers look for fundamentally sound companies that pose a challenge to the counterstock in the short term. Once the fund acquires these stocks at a low price, it waits for the market to correct itself, expecting the stock price to rise.
3. What are the benefits of investing in contra funds?
Contra funds can bring the potential for high returns and diversification, lesser competition, resilience in a market, and long-term wealth creation.
4. What are the drawbacks of contra funds?
Contra funds have higher risks because they take bets on underperforming stocks. Such risks include volatility in a market, an extended period of underperformance, and the scenario where the bets taken do not pay off at all.
5. How do I select the proper contra fund?
Based on the past performance expertise of the fund manager, the investment horizon of expense ratio, and the risk tolerance level, the investor should make the selection. It is always advisable for an investor to seek the advice of a financial advisor for specific guidance.
Author: All Content is verified by SMC Global Securities.
WHY SMC
- 20 Lac+ unique clients
- 33+ Years of Serving
- Advance Technical Analysis
- Free Demat Account
