Contra Funds

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What are Contra Funds?

Contra Funds have become a top-rated mutual fund in recent times. They follow a very different investing style, deriving different returns for the investors. People generally refer to investing in a contra fund as ‘against the wind’ investing. The fund manager who manages a particular kind of contra fund invests in underperforming assets with great potential for future returns. View More

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.

Who Should Invest in Contra Funds?

Contra funds are one of a kind and come with several risks. Hence, investors with this risk-taking ability can only invest in contra funds. These funds do not perform well in the short term; only investors looking for long-term returns invest in a contra fund. The fund capitalizes on the commodities slump and tries to make the most out of it. View More

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

Features of Contra Funds

There are several key features of a contra mutual fund. Some of these key features include:

  • Unique Investing: Unlike other mutual funds, a contra fund does not invest in the best-performing market securities. It relies on the underperforming assets of the market with the expectation that these assets will stabilize and reach their real value in due course of time. Hence, you need to have a lot of patience when dealing with contra mutual funds.

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  • 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.

Taxability of Contra Funds

If you are planning to invest in a contra fund, you must understand how the contra fund returns will be taxed. Most contra funds are equity-based funds. Hence, the taxation of these mutual funds is like all equity funds. View More

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%.

Risk Involved with Contra Funds

  • As most contra funds are equity-related, they come with a high risk. Also, as the current value of the assets under the fund is relatively low, they can go down further if the market is not in the fund’s favor.

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  • 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.

Who are These Funds Suited For?

Contra mutual funds work on strong analysis of the future value of the assets. Hence, a solid financial understanding is needed to understand these funds better. Some investors might not understand the current approach of investing in underperforming assets. View More

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.

Advantages of Contra Funds

Contra funds are an ideal investment for those who know that a company will bounce back from momentary losses and the price of its stocks will increase. While it comes with its share of risks, some advantages of investing in contra funds exist. View More

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.

Popular Contra Funds

  • Fund Name
  • Min SIP Investment Amt
  • AUM (Cr.)
  • 3Y Return

SBI Contra Fund – Direct Growth is an Contra scheme that was launched on 02-01-13 and is currently under the management of our experienced fund manager Dinesh Balachandran. With an impressive AUM of ₹13,460 Crores, this scheme's latest NAV is ₹285.779 as of 18-08-23.

SBI Contra Fund – Direct Growth scheme has delivered a return performance of 23.5% in the last 1 year, 37.7% in the last 3 years, and an 15.9% since its launch. With a minimum SIP investment of just ₹5,000, this scheme offers a great investment opportunity for those looking to invest in Contra funds.

  • Min SIP Investment Amt
  • ₹5,000
  • AUM (Cr.)
  • ₹13,460
  • 3Y Return
  • 23.5%

Invesco India Contra Fund – Direct Growth is an Contra scheme that was launched on 02-01-13 and is currently under the management of our experienced fund manager Taher Badshah. With an impressive AUM of ₹11,024 Crores, this scheme's latest NAV is ₹101.09 as of 18-08-23.

Invesco India Contra Fund – Direct Growth scheme has delivered a return performance of 12.5% in the last 1 year, 22.4% in the last 3 years, and an 17.9% since its launch. With a minimum SIP investment of just ₹1,000, this scheme offers a great investment opportunity for those looking to invest in Contra funds.

  • Min SIP Investment Amt
  • ₹1,000
  • AUM (Cr.)
  • ₹11,024
  • 3Y Return
  • 12.5%

Kotak India EQ Contra Fund – Direct Growth is an Contra scheme that was launched on 01-01-13 and is currently under the management of our experienced fund manager Shibani Kurian. With an impressive AUM of ₹1,779 Crores, this scheme's latest NAV is ₹113.327 as of 18-08-23.

Kotak India EQ Contra Fund – Direct Growth scheme has delivered a return performance of 16.6% in the last 1 year, 25.2% in the last 3 years, and an 16% since its launch. With a minimum SIP investment of just ₹100, this scheme offers a great investment opportunity for those looking to invest in Contra funds.

  • Min SIP Investment Amt
  • ₹100
  • AUM (Cr.)
  • ₹1,779
  • 3Y Return
  • 16.6%

Frequently Asked Questions

What is the best investment horizon for investing in a contra mutual fund?

You must hold a contra mutual fund for at least five years. However, the assets that are a part of the fund may stabilize even more in the future and give you better returns. Hence, you can hold them for another 2-3 years to get better contra fund returns. The duration of the holdings directly impacts the returns you will earn from the fund. 

What is the kind of risks associated with contra funds? 

As contra funds work on the assumption that an underperforming stock will reach its real value in the future, it comes with great risk. There are chances that the asset under the funds never stabilize and hence does not reach their real value. Also, most of the fund’s investments go into equity and equity-linked instruments. Hence, the risk factor increases multifold. Therefore, analyze your risk appetite before investing in these funds. 

Are contra funds suited for investors who have just started investing?

Growth funds are an ideal investment for beginners. Contra funds are more suited for investments by experienced investors who can analyze the market and make an investment decision. Only if an investor has an experience of 5-6 years in the world of investing must they invest in a contra fund. It would be best if you had the expertise to pick the most promising undervalued stocks.

What average return can an investor earn from a contra mutual fund?

The contra fund returns depend on a variety of factors. The one-year annualized return of a contra fund can range from 2% to 20%, depending on the growth of the underlying assets. The 3-year annualized returns can go as high as 35%. Therefore, before you invest in a contra mutual fund, you should check the rate of returns for the fund. 

Are there any restrictions on asset allocation for Contra Funds?

Yes, the Securities Exchange Board of India has several restrictions placed on the allocation of assets. According to SEBI, the fund must invest a minimum of 65% of the total value of equity and equity-linked investments. Therefore, the fund is considered an equity fund as most investments are in equity.

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