Contra Funds are mutual funds that invest in undervalued stocks against the prevailing market trends. It contradicts the usual belief of investing in valued stocks that are growing, but picks up those stocks & sectors which are being ignored in the market with a view that it will come to market value realization and generate returns.
1. What are Contra Funds – Meaning & Definition
Contra is short of ‘Contrarian’ and Contra Funds are Equity Funds that are defined as mutual funds with contrarian views on the market. They are an investment plan in which fund managers pick up not-so-popular beaten down stocks instead of investing in equities that look promising, with a view that the former will perform better in the long run. It is a high risk-return fund and is known for its swim against the tide investment mandate.
Contra Funds bet on stocks that are not recognized by the market at the time it is bought by the fund managers. It might see an uprise in its price value in the long run as markets stabilize. Contrarians believe that exuberant demand or no demand of the stocks lead to mispricing and imbalance in the market. Investors have a herd mentality of purchasing those shares that are in vogue which makes it over-priced. Therefore, instead of buying those shares, Contra Fund managers go against the tide. They anticipate falling down of over-priced assets and then they can capitalize on it gaining handsome returns for the purchased poor performing stocks at the time of its value realization.
They are not meant for short term as markets take time to stabilize and stocks to create demand among investors. The fund investors gain through increase in share prices, especially superlative returns can be earned because the stocks were purchased at a lower cost than the fundamental value
Note: They are different from value funds. As per SEBI regulation, an Asset Management Company (AMC) can either sell value funds or contra funds.
2. Similarities and Differences between Value Funds & Contra Funds
The similarity is that both value funds and contra funds invest in underperforming stocks but the difference is in the investment philosophies. Value funds invest in undervalued stocks based on price and evaluation taking into account fundamental characteristics. Contra Funds invest in undervalued stocks that are underperforming owing to cheap valuation.
Contra Funds are invested in stocks that have strong asset value and high potential in the future but are currently unnoticed by investors and hence trading at lower price. Its price will rise when it attracts attention in the market ensuring returns for those who purchased it at a lower rate quite early. On the other hand, Value Funds are invested in those stocks which are undervalued because the market has some inefficiencies and some stocks trade lower than they are worth it. These stocks are undervalued owing to fundamental attributes at the time of investing.
3. Returns and Risks of Contra Funds
All funds come with their own objective and baggage of risks. Contra Funds are high risk and high-yielding funds as they are equity funds and invest in depressed assets at a time.
Returns – Contra Funds can yield high returns if the stocks have the growth potential. Contra Funds are a long-term investment. As markets stabilise, the fund investors gain through increase in share prices, especially superlative returns can be earned because the stocks were purchased at a lower cost than the fundamental value. Experts suggest that at least 25% percent of investment should be allocated to mutual funds.
Risks – There is an associated risk of ‘value trap’ in which funds believed to have a good value pick in future would continue to drift down. The funds that were underperforming in bearish markets may remain so in bullish markets and do not grow even if all other stocks are performing well. In this case, the underlying assumption that assets will come to its real value may go wrong. Hence, it requires a lot of research and analysis to invest in Contra Funds. However, if the market goes down, it is less vulnerable and there is a lower downside than the overall market because they were already out of favour from the investors.
4. Who should Invest in Contra Funds?
- Investors with high risk appetite as contra funds invest in depressed stocks that may fail to shoot up but if it thrives then high returns shall outweigh the high risks. It is a high risk – high return equity mutual fund invested in neglected stocks with growth potential
- It is surely meant for long term investment as stocks that are witnessing a slump take time to be noticed and perform in the market
- Investors must have patience as their portfolio will contain stocks with negative returns initially and it will grow gradually. Only, if they can go with against-the-wind investing style, they may invest in contra funds
- It is not suggested for first time investors as it will be better to go for less risky investment. One can go for Large Cap Funds that invest in top 100 companies of market capitalization. One can also opt for Multi Cap Funds as it invests across market capitalizations to balance risks and returns
5. Advantages of Contra Funds
- High Returns
Although associated with high risks, Contra Funds are capable of giving high returns, sometimes higher than the average category returns
- Opportunity for Savvy Investors
Investors who have an eye for underpriced but potential stocks that can provide opportunity to savvy investors to gain high returns and accumulate wealth in the long term. It is suggested for investors who understand the macro trends of the market.
All equity funds come with their own set of risks and in Contra Funds, there is a related risk of ‘value trap’. The stocks that are believed to have a good value pick in future may continue to drift down. The funds that were under performing in bear market may remain so in bull market and do not grow even if all other stocks are performing well. In this case, the underlying assumption that assets will come to its real value may go wrong. Hence, it requires a lot of research and analysis to invest in Contra Funds. However, if the market goes down, it is less vulnerable and there is a lower downside than the overall market because they were already out of favor from the investors.
6. Things to be considered before investing
Every investment requires a sufficient amount of research and valuation of factors such as risks involved, history of returns accrued, business proficiency of the holdings etc. Here are some of the things which must be considered by an investor before investing into the Mutual Funds:
- Financial Goal– Before making any investment decisions, it is very important to evaluate that the fund objective is aligned to your financial goals. It is important to look at all the pros and cons as well as risk return ratio of any value oriented fund
- Fund Performance– Measuring the performance of the fund in both bullish and bearish market situations is a necessity as it helps the investors in selecting a reliable fund. One should always choose a fund which has been performing with consistency
- Fund House & Management– There are numerous Mutual Funds regulated by different AMCs (Asset Management Companies). Fund houses & Fund Managers play a very decisive role in the allocation of assets and selection of stocks. If the management has enough experience and expertise, the fund will easily sail through promising market conditions and deliver good returns
- Costs Involved– There are different costs involved in Mutual Fund investments such as Expense Ratio, Entry Load and Exit Load. Investors must review these costs before heading up for investments
Other Basics from the Portfolio: There are other different factors such as the fund NAV (Net Asset Value), AUM (Assets under Management) etc. which are to be viewed to make sure of the reliability and investor engagement in the fund
7. Best Performing Contra Funds to Invest in 2020
In the below table, the two Contra Funds are not just the top Contra Funds based on their 5-Year Returns but also perhaps the only Contra Funds performing in the market. However, there are several value-oriented funds (including both Contra and Value funds) and the best value oriented funds are mentioned in the following table.
|Fund Name||AuM (Cr)||Returns over 1-Year||Returns over 3-Year||Returns over 5-Year|
|Kotak India EQ Contra Fund||811.32||-5%||12%||11%|
|Invesco India Contra Fund||3,879.63||-10%||11%||13%|
|SBI Contra Fund||1,341.25||-15%||1%||5%|
8. Top 10 Value Oriented Funds
|Fund Name||5 Year Returns (%)|
|Invesco India Contra Fund||11.84|
|Kotak India EQ Contra Fund||10.54|
|L & T India Value Fund||10.15|
|Tata Equity PE Fund||9.70|
|Nippon India Value Fund||8.09|
|HDFC Capital Builder India Value Fund||8.01|
|IDFC Sterling Value Fund||6.75|
|UTI Value Opportunities Fund||6.38|
|Quantum Long Term Equity Value Fund||6.33|
|Templeton India Value Fund||5.25|
*Source: Value Research, as on February 24, 2020
9. How to Invest in Contra Funds?
You can invest in large and mid cap funds through either of the following ways-
- Offline mode of investing– If you are not confident of your knowledge, you may choose to invest through a broker. However, investing in a fund through a broker will make you eligible for investments through regular plans that offer different returns and varied expenses in investment. If you wish to invest in the fund independently, you must visit the nearest branch of the AMC of your fund. Don’t forget to carry the following documents-
- Identity Proof (Aadhar Card)
- Cancelled cheque
- Passport size photos (around 4-5)
- PAN Card
- KYC documents (for KYC verification)
- Online mode of investing– If you do not wish to add on to your expense of commissions or brokerage, you may visit online investment platforms such as Paisabazaar.com wherein you can choose from and compare more than 1,700 funds- all in one place, instead of following the long procedure of visiting the website of each AMC and then choosing from them. Here, you can select the fund in which you want to invest, look at the details and compare similar schemes as well as use SIP Calculator or Lumpsum Calculator to estimate the future value of your investment
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