Contra Funds

Several investors see great potential in a contra fund as they are impressed with the way the funds are invested by these mutual funds to get returns. The principal on which contra Mutual Funds work is that people start investing in these assets when there is a buzz around a particular type of fund. Hence, the fund tends to grow, providing significant returns in the future.

The investing style differentiates contra funds from other kinds of mutual funds. As the fund invests in underperforming assets to get the returns, the investors hold them for an extended period, expecting to earn high returns in the future. However, some investors do not have the patience to hold the funds for so long. Hence, they might shun the fund soon. The contra mutual funds work on the idea that if an asset is underperforming or overperforming, it will stabilize shortly and reach its intended real value. Therefore, you should know your risk appetite before you invest in a contra fund.

Thus, these investments are an ideal investment option for:

• Investors looking for a long-term investment option to earn the returns
• Investors who have a high-risk appetite
• Investors who have the patience to wait for their investments to yield return and have the financial stability to bear losses if the market does not work in favor of the fund
• Investors who are open to experimenting with their portfolio

• Long-Term Funds: A contra mutual fund does not consider the short term. Instead, it is based on the assumption that a particular stock will reach its real value and overperform in the future to yield good returns. Hence, these funds are only made for long-term investments.

The returns on a contra fund are taxable in the hands of the investor. Hence, the rate of taxes will depend on the income slab of the investor. However, if you decide to liquidate your fund and sell it off within a year post investing, you will have to pay a short-term capital returns tax of 15%. However, most contra funds are held for more than a year. If you hold the fund for more than a year, your returns up to Rs. 1,00,000 will be exempt from taxes. Any returns you earn beyond Rs. 1,00,000 on a contra fund will be taxed at 15%.

• The contra funds work on the assumption that the currently underperforming stocks will start improving in the future and will reach their original price at some point. However, the assumption might be wrong for most stocks as their value might further deteriorate based on the market’s fluctuations. Hence, the fund manager might exit the fund and incur a loss on the entire investment corpus.
• Contra funds are long-term mutual funds. Hence, realizing contra funds, returns will take a long time. In some cases, the fund might never generate a return.

Hence, only futuristic investors will invest in a contra mutual fund. Also, investors with a contrarian investing style will invest in a contra fund. These funds are managed by fund managers and a team of analysts who can get into the future analysis of the currently underperforming assets.

These funds are suited for people who have:

• Long-term investment goals: The investors looking for steady long-term returns and are ready to hold the fund for more than five years must invest in a contra mutual fund. The longer you hold the fund, the better your chances of generating a good return.
• High risk-taking ability: This fund is ideal for people with great risk-taking ability. These funds invest in equity and equity-linked assets that come with their own set of risks. The risk even increases as the fun is banking on underperforming assets for a return in the long run. Therefore, these funds are high-risk funds. You must analyze your risk appetite before applying for these funds.

Apart from everything listed above, you must also check other critical factors before choosing a contra mutual fund in 2022.

• Expense ratio: Most contra funds come with an expense ratio. An asset management ratio charges an expense ratio to cover the administrative cost of the fund. Therefore, compare the expense ratio of different contra funds and go with the fund with a lower expense ratio.
• Experience of the fund manager: Another essential aspect you must check before investing in a contra fund is the fund manager’s experience. As contra funds contain a pool of underperforming assets that might improve with time, you need to have a fund manager who can analyze the present and future value of the mutual fund. Therefore, check the fund manager’s details before you pick a contra fund.
• Market performance: The market performance of the fund is entirely irrelevant in the case of a contra fund. When you invest in growth stocks, you can predict the returns based on market conditions. However, in contra funds, only the performance of the assets that are a part of the fund matters. Even if the market is underperforming, you might get a good return if the selected stocks that are a part of the fund perform well. However, you might incur losses even when the market is at a high but the selected stocks are not performing.

Some of these advantages include:

• Portfolio diversification: While most investors put their money in growth stocks based on the current market performance, a contra fund gives you exposure to the securities that have great high potential but currently are not doing well due to some externalities.
• Good long-term returns: The fund can generate a good return in the long run. As most underlying assets have a great potential for value increase, the returns improve as the underlying assets become stable. In some cases, the investors might earn returns that beat all benchmarks. This usually happens during a bull run.
• Strong base stocks: Most of the investments that are a part of a contra fund have had their share of good performance in the past. Their values have gone down because of a minor setback in the market. Hence, most of these stocks have good fundamentals and can leave you with good returns in the future.
• Ideal for seasoned investors: If you have been investing in different kinds of securities for a while and are looking for some offbeat investing options, you must invest in a contra mutual fund.
• Hedge against market corrections: As the performance of the contra funds is not market linked, they can provide you with a hedge against all kinds of market fluctuations. These funds can compensate for the losses that you incur because of any market correction.