Fund managers of mutual funds adopt different investing styles to achieve the investment objective of the scheme. Of these, the contrarian style of investing interests many investors. While the risks are high, this style of investing offers investors an opportunity to earn superlative returns. Here, we will explore Contra Mutual Funds, which follow the contrarian style of investing, and talk about some essential factors that you need to know about these funds.
List of Contra Mutual Funds
- SBI Contra Direct Plan Growth
- Invesco India Contra Fund Direct Growth
- Kotak India EQ Contra Fund Direct Growth
What are Contra Funds?
A Contra Mutual Fund invests against the existing market trends and purchases stocks that are not performing well currently. The fund manager takes a contrarian view of the stock when it is shunned by the investors and also when there is a superlative demand for the same. Over-performance and under-performance lead to a distorted asset value, which the fund manager tries to capitalize on. The core belief is that any exorbitant price of an asset will eventually normalize in the long term once the existing triggers are mitigated.
The fund manager of a Contra Mutual Fund purchases stocks at a value lower than its expected value in the long term. There can be times when certain sectors witness a slump due to the prevalent market conditions. A contra fund invests in stocks of companies from these sectors and holds on to them till the demand increases. It is important to note here that these funds tend to perform better over the long term and are not ideal for short-term investments.
Features of a Contra Mutual Fund
Contra mutual funds have the following main qualities that distinguish them:
Risk-Reward Ratio
Contra funds have a higher risk-reward ratio since they invest in companies that are seeking to reach their full potential. Fund managers meticulously evaluate these companies in order to select those with the best potential for growth.
Equity Investment
These funds must devote at least 65% of their assets to equity-linked products and equity derivatives. This allocation emphasizes the fund's emphasis on equity growth prospects.
How Does a Contra Mutual Fund Work?
When compared to other mutual fund schemes, a contra fund operates significantly differently. It employs a strategy that assumes the asset class in which the counter-fund invests will improve at some point in the future. Fund managers may be able to get a good deal on these inexpensive securities. These investments are made with a long time horizon in mind.
How Should You Invest in a Contra Mutual Fund?
- You can invest in these funds through Asset management companies or also via Groww.
- You can sign up on Groww’s application, complete KYC, and start investing.
Why Should You Invest in a Contra Mutual Fund?
Despite the risks, contra-mutual funds can provide a variety of benefits:
High Returns
When underperforming equities recover, prudent contrarian investing can deliver substantial rewards.
Long-Term Growth
Contra Mutual funds may be a sensible choice for long-term investors looking for value that may take time to emerge.
Diversification
Contra funds can help to diversify a portfolio, especially if the other assets in the portfolio are more traditional.
Taxation Rules of Contra Mutual Funds
Tax rules applicable to such mutual funds’ gains are as follows:
Long-Term Capital Gains -10% Without indexation (less than Rs. 1 lakh.)
Short Term Capital Gains -15%
FAQs
Q1. What is Contra fund meaning?
A contra fund is a form of mutual fund that invests in the opposite direction of the market. Contra funds invest in stocks that are now out of favour or undervalued, as opposed to popular and performing well stocks.
Q2. Who can invest in Contra funds?
These funds can be suitable if you have a reasonable risk tolerance and can invest for the long term.
Q3. Are contra funds risky?
Contra funds are thought to be high-risk investments. They invest in equities and underperforming industries that may have a promising future. Contrarian investing entails investing against market sentiment.
Q4. Are contra funds rewarding investments?
Contra funds are high-risk, high-reward investments that can produce better long-term returns.
Q5. Where are contra funds invested?
A Contra Mutual Fund invests against current market trends and purchases underperforming stocks.
Disclaimer - Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
