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Contra Funds: Meaning, Working, & Benefits

When investing money in mutual funds, what’s your approach to selecting the right funds? Do you want to invest when the market is down or vice versa? Is investing against the market dynamics during the current interest rate surge the right choice?

In investment terminology, the good or bad related to any market condition largely depends on an investor’s understanding of the market and how to make the most of it. In that case, even investing against the current market conditions may benefit investors.

Are you willing to explore mutual fund schemes that are contrary to the prevailing investment trends ? You should know more about contra funds. Let’s take a deeper look.

What are Contra Mutual Funds?

Contra funds are a type of equity mutual fund that bets against the prevailing market sentiments and trends in undervalued stocks to create opportunities to garner potential returns. Simply put, the fund manager invests in the stocks of companies that are not performing well in the short term. The selection of stocks of companies considers strong fundamentals even if the share price is undervalued.

As per SEBI (Mutual Fund) Regulations, 1996 and amendments made thereunder, it is mandatory for contra mutual funds to invest a minimum of 65% of their total assets in equity & equity related instruments.

Features of a Contra Mutual Fund

The contra fund meaning refers to investing in stocks that are currently undervalued or overlooked by the market, with the expectation that they will perform well in the future. To understand in detail what is contra fund, let us look at some of its features -

  1. Contrarian Investment Strategy

    Contra funds follow a strategy of buying when others are in a sell-off and selling when others are in a buy-in, going against typical market momentum with an aim to capitalise on overlooked opportunities.

  2. Focus on Undervalued Assets

    "These funds target undervalued stocks or sectors with growth potential. Fund managers often use detailed financial analysis and market insights to identify investments that are expected to rebound over time.

  3. Long-Term Investment

    Contra funds are specifically designed for long-term investors, as it may take several years for undervalued assets to realise their potential. Investors need to be patient and maintain a long-term outlook in order to potentially benefit from this strategy.

  4. Higher Risk Exposure

    Due to their contrarian approach, contra mutual funds can be more volatile compared to traditional equity funds, especially during market downturns. This higher risk exposure is often associated with the potential returns over time.

  5. Potential for Outperformance

    If the contrarian strategy is executed successfully, contra funds can potentially deliver potential returns in the long run. However, it is important to recognize that past performance is not an indicator of future success, and market conditions can vary.

Working of Contra Funds

The basic approach followed by contra funds is to focus on the stocks of companies that are not performing well currently. For example, metal companies may be underperforming because of the current market trends. But a swift turnaround in performance can make them eligible as contra stocks. When the current impact or problem gets resolved soon, the stock may become an outperformer. This is how contra-mutual funds go against conventional investment wisdom.

How Can You Benefit from Investing in Contra Funds?

While the choice of available contra funds may be limited, investors do see various benefits from investing in these funds, including the following:

  1. The well-calibrated contrarian approach followed by these mutual fund schemes gives them the potential to generate inflation-beating returns for investors. The returns you can expect may be worth the risk taken.
  2. Contra mutual funds consider the stocks of companies generally overlooked by other analysts. Also, the impact of institutional trades in this segment could be more extensive.
  3. Generally, a contra fund manager buys suitable stocks when undergoing a period of underperformance, which reduces their purchase price. This allows the contra fund investors to get good bargains with this investment approach.
  4. Contra funds tend to hold their value during market fall or prolonged downsides
  5. Investors having a long-term horizon for contra-fund investments may benefit considerably in the long run.

Are Contra Mutual Funds Right for You?

Take it from the market perspective -

Many stocks do not perform well due to market conditions or other economic factors but are fundamentally strong. Here, the chances are that they will take some time to get out of trouble and expected to perform well again. Therefore, if you feel you are impatient and often panic sell during the bad news to cut potential losses, contra funds can be suitable for you. They are not suitable for traders who wish to make more money in the short term with their investment decisions.

However, if you are the one who can sit stronger and have patience until the market conditions improve and become favourable, contra-mutual funds can be fruitful for you. Keep in mind that it may also take a longer time for markets to recover than previously anticipated in some situations.

How to invest in Contra Mutual Funds?

Investing in contra mutual funds might be more suitable for those who are not beginner investors. To get started, follow these simple steps:

  1. Research and Understand: Familiarise yourself with contra mutual funds and their investment philosophy. Ensure they are consistent with your financial targets and risk tolerance.
  2. Complete KYC: Before investing, complete your Know Your Customer (KYC) process. This is a mandatory requirement for investing in mutual funds.
  3. Select a Fund: Identify reputable contra mutual fund schemes with a proven track record. Look for funds that have consistently delivered returns, even during market downturns.
  4. Open an Account: Create an account with an asset management company (AMC) or use an online investment platform that offers mutual fund investments.
  5. Choose Your Investment Mode: Decide whether to invest a lump sum amount or set up a systematic investment plan (SIP) based on your financial capacity.

By implementing these steps, you'll be able to invest effectively in contra mutual funds and potentially benefit from their long-term growth potential. Remember, a clear understanding and adequate research of your investment goals are crucial for investing.

What Should You Consider Before Investing in a Contra Fund?

Keep the following things in mind to put the contra mutual fund meaning into action:

  • Make sure you have considered your risk appetite and are willing to take risks associated with investing in contra funds. At large, realising a potential return on your contra fund investments may take a long time. Hence, invest in these funds if you have a high-risk tolerance.
  • Expecting your investments in contra funds to happen in just a year is unrealistic. Keep an investment horizon of five to seven years minimum to maximise the potential returns.
  • Invest in contra funds based on your financial goals that lie in the long tenure. Avoid being too aggressive, as you may not get the expected returns within a short time.
  • You can also benefit from the power of compounding by investing in contra mutual funds via a Systematic Investment Plan (SIP)^.

    • FAQs

    What are contra funds?

    A contra fund is a type of fund that invests primarily in the equity & equity related instruments or stocks of underperforming companies in the short run. It follows a contrarian investment approach by buying stocks at a low price to fetch potential returns.

    What is the difference between value funds and contra funds?

    The main difference between these two types of mutual funds is that value funds invest in undervalued stocks, while contra funds invest in underperforming stocks.

    Is contra fund a debt fund?

    Contra funds are equity mutual funds and are focused more on the stocks of underperforming companies.

    ^SIP stands for Systematic Investment Plan, wherein you can regularly invest a fixed amount at periodical intervals and aim for the benefits over a period of time through the power of compounding.

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    Disclaimer:
    This is an investor education and awareness initiative by Nippon India Mutual Fund.
    Helpful information for investors: All Mutual Fund investors have to go through a one-time KYC (know your Customer) process. Investors should deal only with registered mutual funds, to be verified on SEBI website under 'Intermediaries/ Market Infrastructure Institutions'. For redressal of your complaints, you may please visit www.scores.gov.in . For more info on KYC, change in various details & redressal of complaints, visit mf.nipponindiaim.com/investoreducation/what-to-know-when-investing This is an investor education and awareness initiative by Nippon India Mutual Fund.

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