Most of the investors prefer putting their money in companies that are doing well. That’s the usual investment strategy. But there’s a category of mutual funds that prefer companies (with a strong balance sheet) that are currently going down the road and have cheap share price. These are called contra funds.
Let’s learn what are Contra Mutual Funds and the best contra funds in India.
What are Contra Funds?
Contra funds are those mutual funds that follow a contrarian investment strategy. The fund manager of these funds invest in companies that are either not doing well or experiencing a decline at the time.
Fund managers of contra funds make investments in fundamentally strong but currently cheap stocks that are not the market’s top picks. The idea is to buy assets at a cost lower than its fundamental value in the long term.
As per SEBI regulations, Contra Funds must invest a minimum of 65% of their total assets in equity and equity-linked securities.
Best Contra Funds in India, 2023
The following-mentioned are some of the top contra funds available in India:
- SBI Contra Fund – Direct Plan – Growth (Estimated Return in 5 years: 14% approx.)
- Kotak India EQ Contra Fund – Direct Plan – Growth (Estimated Return in 5 years: 14% approx.)
- Invesco India Contra Fund – Direct Plan – Growth (Estimated Return in 5 years: 12.5% approx.)
Who Should Invest In Contra Mutual Funds?
While patience is the key to successful investing, investing in counter funds calls for an extra dose. It’s because these funds invest in stocks that are performing poorly for a variety of reasons. Investors must therefore wait till the causes pass and the equities resume performing before they may profit.
Additionally, investment in Contra Funds carries a higher risk in the short term than investing in other companies from profitable industries. A contra fund does not bet against the current favorite or alter market momentum.
Features of Contra Mutual Funds
The following are the main features of a contra fund:
- Contra mutual funds must invest at least 65% in equities
- 10% long-term capital gains tax after a year on returns in excess of Rs 1 lakh in a fiscal year
- Contra funds are very risky investments
- Dividend payouts up to Rs 5,000 are tax-free; amount after this is taxed @10%
Contra Funds: Key Takeaways
- As the name implies, Contra funds take opposing positions in response to market movements. A contra fund’s fund manager selects inexpensive equities to invest in.
- It may take a long time to see a good return on your investment in counter funds, and that moment may never come.
- During a bull market, contra funds have the protentional to outperform the market.
Contra Fuds: FAQs
Contra Mutual Fund invests against current market trends and buys underperforming companies. The fund manager takes a contrarian position on the stock when it is rejected by investors and in high demand.
Contra and value funds acquire assets in unconventional methods. For example, Contra funds invest in underperforming firms, and value funds invest in undervalued inequities. Contra and value funds, on the other hand, are high-risk, long-term investments that need extensive study, analysis and perseverance.
The contra strategy involves the buying or selling of assets that flow against the wider market or the economy
Contra funds are not appropriate for short-term investment plans. They have a non-linear behavior and take a long time to generate returns. That being said, with the right patience, contra funds can help investors reap healthy returns.
The effectiveness of Contra Funds is based on how much advantage they have gained from underperforming businesses. These businesses have a great deal of development potential, but they are unable to realize it due to numerous outside factors.
A Contra Fund does not follow market trends or place bets on hot commodities. It places wagers on inexpensive stocks. As a result, investors with a respectable level of risk tolerance and a time horizon of more than five years may want to think about investing in counter funds.
Also, read about Mutual funds vs. Fixed Deposits on Investment Simplified.