Contra Funds
Investing in the stock market requires different strategies to balance risks and rewards. One such strategy is Contra Funds, a category of mutual funds that goes against the grain by investing in undervalued or underperforming stocks. This investment strategy relies on market cycles, making it a unique choice for long-term investors.
What is the Contra Fund?
A Contra Fund is an equity mutual fund that follows a contrarian investment strategy. The fund manager invests in underperforming or undervalued stocks that have the potential to grow in the long term. This strategy is based on the belief that market trends can reverse, and the value of these underappreciated stocks will increase when the market corrects itself.
How do Contra Funds Work?
Contra funds work by identifying companies that are temporarily out of favour with the market but have strong fundamentals. The fund manager buys these stocks lowly, anticipating their value will rise over time. This long-term investment strategy involves thorough research, patience, and market insights. For example, a contra fund might invest in sectors like manufacturing or infrastructure when they are not performing well but are expected to grow.
Features of Contra Funds
- Contrarian Strategy: Invests in undervalued stocks that the market currently overlooks.
- Long-Term Focus: Typically requires a long-term investment horizon for optimal returns.
- High-Risk, High-Reward: These funds invest in underperforming stocks, which means they carry higher risks but can yield substantial returns.
- Actively Managed: Fund managers are crucial in selecting the right stocks based on in-depth research and market trends.
List of Contra Mutual Funds
Here are some popular contra funds available in India:
Advantages of Contra Funds
- Investing in undervalued stocks can benefit from a significant upside when these stocks recover.
- Contra funds invest in sectors and companies that may not be part of mainstream portfolios, offering diversification benefits.
- The fund benefits from market cycles by investing during downturns and reaping rewards during recoveries.
For example, SBI Contra Fund has delivered an average return of around 18% over the last five years, outperforming several traditional equity funds.
Risks of Contra Funds
- Contra funds invest in underperforming stocks, which are more volatile than regular equity funds.
- Investors must be patient, as the returns may take years to materialise.
- The success of a contra fund heavily depends on the fund manager’s expertise in picking the right undervalued stocks.
Who Should Invest in Contra Funds?
Contra funds are ideal for experienced investors who understand market cycles and can handle high-risk investments. These funds are best suited for individuals with a long-term investment horizon, typically five years or more, as they need time to generate substantial returns. Investors with a diversified portfolio looking for additional growth opportunities can also consider contra funds.
How to Invest in Contra Funds?
You can invest in contra funds through various platforms:
- Directly through AMCs (Asset Management Companies): Most fund houses offer the option to invest directly via their websites.
- Mutual Fund Platforms: Online platforms such as Stack Wealth make it easy to invest in contra funds.
- Financial Advisors: Consulting a financial advisor can help you choose the best contra fund based on your financial goals.
You can start investing with a minimum amount of ₹500 in SIPs (Systematic Investment Plans) or through a lump sum investment.
Taxation on Contra Funds
Contra funds, being equity-oriented funds, follow the same taxation rules as equity mutual funds in India:
- Short-Term Capital Gains (STCG): If the investment is held for less than one year, gains are taxed at 15%.
- Long-Term Capital Gains (LTCG): Gains over ₹1 lakh after holding for over a year are taxed at 10% without indexation.
For instance, if you invest ₹2,00,000 in a contra fund and profit from ₹50,000 within a year, your tax liability on the gain would be ₹7,500 (15%).
