Mutual fund managers employ many investment approaches to fulfill scheme's investment goal. Among these, lot of investors are interested in contrarian investment strategy. Despite significant dangers, this investment approach presents remarkable chance for investors to generate exceptional profits. contra mutual fund meaning highlights focus on undervalued stocks, aiming to buy low & sell high as market perceptions change.
What is Contra Fund?
Value funds & counter funds are frequently confused. Even though they do have certain things in common, they differ greatly from one another. primary goal of value funds is to purchase stocks at discount to their real value. Just like Buffett mentioned, they search for margin of safety. Contra Funds, on other hand, concentrate on stocks that, while underperforming at moment, are anticipated to outperform market in future.
How Does Contra Mutual Fund Work?
In essence, contra fund is equities mutual fund. stocks of underperforming corporations are main emphasis here, though. Steel, for instance, can be performing poorly before steel cycle bottoms. However, performance turnaround is imminent. Investing in it can be contrarian move. Contra funds essentially challenge accepted wisdom.
Emphasis is on stocks of businesses that aren't doing so well right now. stock is anticipated to outperform when existing performance or perception issue is fixed in near future. These contra funds placed their bets on that. You may even refer to it as unconventional or contrarian approach to stock investment.
Characteristics of Contra Funds
Contra mutual funds are distinguished by following key characteristics:
Risk-Reward Ratio: Because contra funds invest in businesses that aim to realize their full potential, they have higher risk-reward ratio. Fund managers carefully assess these businesses to choose ones with highest development potential.
Equities Investment: At least 65% of assets in these funds must be allocated to equities derivatives & equity-linked instruments. fund's concentration on chances for equity growth is highlighted by this allocation.
Benefits of Contra Funds
Such contra stocks may be hard to come by for contra fund manager. Investors do, however, see few clear advantages to funding these contra funds. Here are some examples of these advantages:
1. Contra funds frequently take contrarian stance, & when properly managed, these concepts can provide investors returns that exceed market. Of course, there is always risk, but sometimes rewards outweigh danger.
2. Contra funds concentrate on businesses that majority of analysts & investors typically ignore. Because of this narrow research emphasis, it stands to reason that institutional transactions will have limited effect on this counter.
3. Contra funds typically purchase equities during periods of underperformance, which means that price is typically low at these times. As result, contra fund investors indirectly benefit from attractive prices on contra stocks.
4. It has been noted that high beta equities typically suffer most during periods of market collapses or protracted declines. In these situations, counter funds typically outperform other fund types in terms of value retention.
5. majority of contrarian stocks contain lot of pent-up potential, but because of their apparent issues, stock price does not reflect this value. When these problems are resolved, stock typically rises as it catches up.
How to Invest in Contra Funds
It's not complicated, but there are some unspoken guidelines to follow if you want to invest in contra funds & take full use of chance. Let's examine these unspoken guidelines.
1. Contra funds are not for you if you lack patience. It usually takes time for contra stocks to emerge from difficulty & begin to perform. To anticipate to be able to generate money on contra funds would be naïve unless you adopt 3–4-year time horizon.
2. majority of contra fund triggers have long duration. Therefore, refrain from attempting to trade or call bottom of these funds. Losing money is more likely to occur. This stock should not be timed in market.
3. If you invest in counter funds, never lose hope. Compared to many other growth or momentum stocks, they take longer to produce returns that are desirable. Even after you invest, there may be terrible news about these socks & funds, but panicking is not solution.
Why Should You Invest in Contra Mutual Fund?
Contra-mutual funds can offer number of advantages despite risks:
1. High Returns: Cautious contrarian investment can yield significant gains when lagging stocks rebound.
2. Long-Term Growth: For long-term investors searching for value that might take some time to manifest, Contra Mutual funds might be wise option.
3. Diversification: Contra funds can contribute to portfolio diversification, particularly when combined with more conventional assets.
Examples of Contra Funds
As previously said, there is propensity to lump value funds & counter funds together into one category. However, that would ignore primary distinction between two. Therefore, we will continue to use AMFI definition of contra funds. Only three mutual fund companies—SBI Contra Fund, Kotak India Contra Fund, & Invesco India Contra Fund—offer contra funds in India at moment.
performance of these three alternative funds over one, three, & five years is shown in table below.
| Scheme Name | NAV Direct | Return 1 Year (%) Direct | Return 3 Year (%) Direct | Return 5 Year (%) Direct | Daily AUM (Cr.) |
| Invesco India Contra | 84.48 | 33.17 | 19.40 | 20.25 | 8,194.50 |
| Kotak India EQ Contra | 90.71 | 33.81 | 19.29 | 19.76 | 1,173.34 |
| SBI Contra Fund | 210.48 | 54.63 | 24.89 | 18.66 | 3,451.66 |
Data Source: AMFI
Risks & Considerations
Before you invest in counter funds, take look at this short Considerations.
1. Make sure you are willing to take on risk because, even in equity fund space, contra funds have far higher risk than large cap or diversified equity funds. On risk scale, contra funds are more volatile.
2. Do you possess perseverance? It is not solution to invest in hedge funds & hope for miracles to come after year. To truly reap benefits of these counter funds, give yourself time horizon of five to seven years. In little amount of time, pressure mounts.
3. Keep in mind that returns have tendency to be back-ended when you are planning your goals against contra funds. Avoid having overly high expectations for contra money. Nothing will occur right away.
4. Because of greater risk quotient, try to employ Systematic Investment Plan (SIP) strategy. Spreading out your purchases will, at minimum, guarantee that initial cost of obtaining these contra fund units will be minimal.
Conclusion
A contra mutual fund meaning revolves around investment strategy where fund manager invests in stocks that are currently out of favour with market but have potential for future growth. Contrarian investing involves opposing strategy fund that focuses on buying undervalued assets when others are selling. This counter-cyclical investment approach characterizes non-traditional fund, often employing value investing approach. anti-momentum fund leverages fundamental analysis to select stocks, promoting portfolio diversification. This active management approach aims to capitalize on market inefficiencies for long-term gains.
