Looking for an intriguing investment option in the world of mutual funds? Consider Contra Funds, which approach investment uniquely setting them apart from conventional funds. By going against the prevailing market sentiment, these funds aim to deliver potentially higher gains to investors. Let's explore the fascinating world of contra funds and understand how they operate to unlock their potential benefits.

What are Contra Mutual Funds?

Contra mutual funds specialize in investing in underperforming stocks of companies that have the potential for future growth. They take a contrarian approach, going against the prevailing market sentiment. By identifying undervalued stocks that are likely to rebound, these funds aim to achieve higher returns, although they also come with increased risks. In essence, contra funds challenge conventional wisdom and employ an out-of-the-box approach to equity investing.

How do Contra Mutual Funds Work?

The fund manager of a contra mutual fund looks for companies that are undervalued by the market and have the potential to grow in the future. The fund manager then buys these stocks and holds onto them until they become popular in the market.

When the stocks become popular in the market, the fund manager sells them and realizes a profit. The fund manager then reinvests the profits into other undervalued stocks. This process of buying undervalued stocks and holding onto them until they become popular with the market is known as contra-investing.

Who Should Invest in Contra Mutual Funds?

Contra funds are suitable for investors with advanced knowledge of macro trends, willing to take selective bets for higher returns compared to other equity funds. However, they should be prepared for the possibility of moderate to high losses, despite the overall market performance. Patience, reasonable risk tolerance, and a long-term investment horizon of 5+ years are key factors for investing in Contra Mutual Funds.

Why Invest in Contra Mutual Funds?

There are several reasons why you should consider investing in contra-mutual funds:

• Potential for higher returns: Contra mutual funds have the potential to provide higher returns than other types of mutual funds because they invest in stocks that are currently out of favor with the market.
• Diversification: Contra mutual funds provide diversification because they invest in stocks that are not currently in favor of the market. This means that they are not correlated with the overall market and can provide a hedge against market volatility.
• Professional management: Contra mutual funds are managed by professional fund managers who have the expertise to identify undervalued stocks and invest in them.
• Contrarian Approach: Contra funds can generate above-market returns by adopting a contrarian approach, although the risk is present.
• Overlooked Companies: Contra funds focus on companies that are often ignored by analysts and investors, limiting research and the impact of institutional trades.
• Low-Priced Opportunities: Contra funds buy stocks during periods of underperformance, allowing investors to indirectly acquire contra stocks at lower prices.
• Resilience in Market Downturns: During market crashes or prolonged downturns, contra funds tend to hold value better than other fund types, especially high beta stocks.
• Unlocking Hidden Value: Contrarian stocks often possess untapped potential that is not reflected in their stock prices. When these issues are resolved, there is a potential surge in the stock as it catches up.

How to Invest in Contra Mutual Funds?

Investing in contra mutual funds is easy. It is advised to invest in contra mutual funds through a mutual fund distributor or an online mutual fund platform or an Asset managing platform. Here are the steps to invest in contra mutual funds:

1. Choose a contra-mutual fund: Choose a contra-mutual fund that suits your investment goals and risk appetite.
2. Complete the KYC process: Complete the KYC process by submitting your PAN card, Aadhaar card, and other relevant documents.
3. Submit the application form: Submit the application form along with the required documents and investment amount.
4. Track your investment: Track your investment through the mutual fund distributor or online mutual fund platform. It is indeed an important step.

Considerations Before Investing In Contra Mutual Funds:

• Patience is key: Contra funds require a long-term perspective of 3-4 years to yield returns, so if you lack patience, they may not be suitable for you.
• Avoid market timing: Contra stocks have long-term triggers, so attempting to time the market or predict their bottom is not recommended as it can lead to financial losses.
• Don't panic: Contra funds take longer to show results compared to other growth or momentum stocks. Stay calm even if there is negative news after you invest.
• Risk factors: Contra funds involve risks, but with patience, staying power, and conviction, they have the potential to provide solid returns over the long term.

How Taxation Works On Contra Mutual Funds?

Contra funds are classified as equity funds for tax purposes since they have more than 65% equity holdings. Short-term gains on contra funds (held for less than 1 year) are taxed at a concessional rate of 15% on the gains. Long-term gains (held for more than 1 year) above Rs.1 lakh are taxed at a flat rate of 10% without indexation benefits. Short-term capital losses can be set off against both long-term and short-term gains, while long-term capital losses can only be set off against long-term gains. Dividends on equity and debt funds are considered as other income and taxed at the applicable incremental rate.

Contra Mutual Funds To Check Out:

Here are some examples of contra-mutual funds in India:

• SBI Contra Fund:

SBI Contra Fund aims to generate long-term capital appreciation by actively managing investments through a contrarian investment strategy. It invests at least 65% in contrarian-themed stocks and has the flexibility to allocate up to 35% in other equities, debt, or money market instruments. The fund utilizes a top-down and bottom-up approach for stock selection, making it suitable for investors seeking diversified equity investments with a contrarian strategy for long-term growth.
SBI Contra Fund is managed by Mr. Dinesh Balachandran with an asset value of ₹11893.26 crores. The fund has annualized return values of 43.15% for 3 years and 18.79% since inception with a very high risk.

• Invesco India Contra Fund:

Invesco India Contra Fund is an investment option that employs a contrarian strategy. It targets fundamentally strong companies with undervalued or turnaround potential. Ideal for long-term investors seeking capital growth through contrarian investing in equity and related instruments.

Invesco India Contra Fund is managed by Mr. Taher Badshah and Mr. Dhimant Kothari with an asset value of ₹ 9917.73 crores. The fund has annualized return values of 24.04% for 3 years and 14.15% since inception with a very high risk.

• Kotak India EQ Contra Fund

Kotak India EQ Contra Fund is an open-ended fund ideal for investors pursuing long-term capital growth. It focuses on investing in a portfolio primarily consisting of equity and equity-related securities.

Kotak India EQ Contra Fund is managed by Ms. Shibani Sircar Kurian with an asset value of ₹ 1688 crores. The fund has annualized return values of 27.01% for 3 years and 16.00 since inception with a very high risk.

Conclusion

While Contra Mutual Funds come with increased risks, they provide the opportunity for higher returns and diversification. Investors with advanced knowledge, patience, reasonable risk tolerance, and a long-term investment horizon may find contra mutual funds to be a suitable addition to their investment portfolio. However, it's important to consider the long-term perspective, avoid market timing, and be prepared for potential fluctuations and volatility. With proper considerations and a strategic approach, Contra Mutual funds can unlock hidden value and deliver solid returns over time.