Equity Mutual Funds

Contra mutual funds

Want to take a bold step in mutual fund investing? Contra mutual funds could be your strategic edge. These funds employ a contrarian approach, investing in sectors or stocks that the market currently undervalues or overlooks. While others follow the trend, Contra funds spot opportunities in market overreactions and aim for long-term gains when the tide turns. At Ventura, we help you understand how this strategy works and whether it fits your goals.

From core benefits to understanding who these funds are best suited for, this page covers all you need. If you are ready to know everything about Contra mutual funds and invest with a fresh perspective, we are here to guide you through every step.

 

About Contra funds

In Contra funds, investments are made in companies or sectors that are currently out of favour in the market but are believed to have strong long-term potential. Unlike regular equity funds that ride market trends, Contra funds follow a contrarian strategy. This means they invest in companies that are undervalued or neglected by the broader market, aiming to benefit when those companies eventually return to favour.

As per Securities and Exchange Board of India (SEBI) guidelines, Contra mutual funds must allocate at least 65% of their portfolio to equity and equity-related instruments. Fund managers of Contra mutual funds rely on in-depth research and analysis to identify fundamentally strong companies trading at lower valuations.

This strategy makes Contra funds particularly interesting for those looking to take a different path in wealth creation, as it allows investors to buy low and sell high, potentially.

 

Advantages of investing in Contra funds

Investing in a Contra mutual fund can offer multiple benefits, especially for long-term investors. Here are the key advantages:

• Buy low, sell high: Since Contra funds invest in undervalued stocks, there is a higher chance of earning strong returns when the market corrects itself.

• Portfolio diversification: Contra funds provide diversification by including assets not commonly found in mainstream funds.

• Professional fund management: Investment choices are guided by experienced fund managers who focus on identifying long-term growth opportunities through detailed analysis.

• Ideal for volatile markets: During market volatility, Contra mutual funds often outperform growth or momentum strategies.

• Reduced risk of overvaluation: By investing in neglected or underpriced sectors, the fund avoids overvalued stocks that could fall during corrections.

These advantages make Contra mutual funds an essential tool for strategic portfolio building.

 

How Does a Contra Fund Work?

A Contra mutual fund functions by identifying stocks and sectors that are currently out of favour but possess strong fundamentals. This could include companies that have suffered temporary setbacks, industries going through regulatory changes, or businesses affected by cyclical downturns.

Here’s how it typically works:

• Stock screening: Fund managers scan for undervalued stocks with strong fundamentals.

• Contrarian assessment: They evaluate if the negative sentiment is temporary or permanent.

• Portfolio construction: Stocks and sectors showing long-term recovery potential are added to the portfolio.

• Holding period: These investments are held patiently until the market recognises their value.

• Exit strategy: Once the stock reaches its potential or becomes overvalued, the fund manager exits the position.

This approach requires extensive research, strong analytical skills, and a deep understanding of market behaviour. Contra funds often underperform in short-term bull markets but shine over longer periods.

 

Is it good to invest in a Contra fund?

Yes, Contra mutual funds can be a good investment, particularly for investors with a long-term horizon. However, the decision depends on several factors:

• Market timing: These funds work well when the market is overreacting or irrationally pricing stocks.

• Patience required: Returns are not immediate. Investors must be willing to stay invested for several years.

• Risk appetite: Although diversified, Contra funds carry market risk. They are better suited for moderately aggressive investors.

• Portfolio balance: They can complement aggressive growth funds by adding a value-oriented component.

If you understand that markets are cyclical and are comfortable going against short-term trends, then investing in Contra mutual funds can prove to be highly rewarding.

 

Who should invest in Contra funds?

Contra mutual funds are not for everyone. They suit a specific kind of investor profile. Here’s who should consider investing:

• Long-term investors: Those planning to stay invested for at least 5-7 years.

• Value-oriented thinkers: Investors who believe in identifying value over hype.

• Experienced investors: Those familiar with market cycles and comfortable with temporary underperformance.

• Diversifiers: Investors looking to add an alternative equity strategy to their portfolio.

• Moderate to high-risk takers: People who can handle market volatility in pursuit of long-term gain.

Before investing in a Contra fund, one should assess personal financial goals, risk appetite, and the ability to stay invested through market cycles.

 

How should you invest in a Contra fund?

There are two primary ways to invest in a Contra mutual fund:

• Lumpsum investment

This strategy is best suited when the market has undergone a correction. A lumpsum investment enables units to be purchased at a lower Net Asset Value (NAV), offering scope for gains as the market recovers.

• Systematic Investment Plan (SIP)

SIPs are ideal for most investors. They enable regular small investments, helping to minimise the risk of market timing while benefiting from rupee cost averaging. 

Before you start investing:

• Research: Study the fund’s past performance, portfolio composition, and the fund manager’s strategy.
• Comparison: Use platforms like Groww, Dhan, or Ventura to compare Contra mutual funds.
• Financial goals: Align the investment with long-term financial goals like retirement or education.

A disciplined and informed approach ensures that your investment in Contra funds aligns with your financial objectives.

 

Taxation rules for Contra funds

Being equity-oriented, Contra mutual funds follow the same tax structure as other equity mutual funds in India:

• Short-term capital gain: Profits from units held for under 12 months are subject to a 15% tax.
• Long-term capital gains: Gains exceeding ₹1 lakh in a financial year, from units held for more than 12 months, are taxed at 10% without indexation.
• Dividend taxation: Dividends (if any) from the Contra mutual funds are added to your total income and taxed according to your income tax slab.

It is advisable to consult a tax advisor to understand the exact tax implications based on your income bracket and investment size.