Contra Funds – Definition, Advantages & Risks

What are Contra Funds?

Contra funds are equity funds, which invest in equities with a contrarian view on the market. Fund managers of these funds bet against prevailing market trends and sentiments. They pick up undervalued but fundamentally sound stocks, ignored by the market, at lower prices to benefit from steep rises in them as and when the market takes note of these stocks. As per SEBI regulations, contra funds have to invest at least 65% of total assets in equity and equity linked instruments.

Why Invest in a Contra Fund?

• Identifies and invests in hidden or ignored investment opportunities
• Can earn superlative returns as stocks with sound fundamentals are bought at lower cost and sought to be sold when the broader market takes not of them
• Have lower downside risk when compared to other large cap, multi cap, mid cap and other equity fund categories as the portfolio constituents of contra funds trade at discounts relative to their past valuations
• Can serve as good hedge during overvalued market conditions against market corrections

Difference Between Value and Contrarian Style of Investing

Value funds and contra funds are similar in the sense that both of them base their investment decisions primarily on the basis of valuation comfort offered by their scrips. However, there is a thin line of difference between contrarian and value investing. While value investing focuses on the gap between the intrinsic value and trading price of the shares, contrarian investing focuses on out of favour but fundamentally sound stocks trading at a lower prices than their recent past, and not necessarily at discount to their intrinsic value.

Performance of Contra Funds

Data as on December 9, 2025 

Risks of Investing in Contra Fund

• Contra funds can fall into price trap where their underperforming constituents continue to underperform for longer than expected, forcing the funds to sell the securities at loss or for very low returns
• Contra investment calls can take exceptionally long time before getting the desired attention of the other market players 

Who Should Invest in Contra Funds

• Investors preferring undervalued stocks overlooked by the market
• Those wishing to contain their downside risk in overvalued market conditions
• Those having enough patience to wait for the contra plays to work out
• Those who do can check their emotions during the market volatility
• Those having long investment horizon, five years at least, and preferably 7 years and above to derive maximum benefit from an entire investment cycle