Home
>
Articles
>
Contra Fund: All you need to know!

Contra Fund: All you need to know!

Last updated: 22 Nov, 2021 | 11:30 am

What is Contra Fund: Contra Fund Meaning, Advantages & More | INDmoney

What is a Contra Fund?

Contra fund is an equity mutual fund in which the fund manager invests mostly in equities of companies that are not performing well in the short term. The idea is that buying equity at a low price today will be profitable in the long term when the business problem is resolved and the stock will witness a strong rally. In other words, this is a contrarian approach of investing to buy equities at a low price today to fetch great returns in the future.

List of the best contra funds

Only three mutual fund houses can provide contra funds in India, namely SBI Contra Fund, Kotak India EQ Contra Fund, and Invesco India Contra Fund.

·        SBI Contra Fund – It has fetched a 5-year return of 18.6% and a 3-year return of 26.34% with a minimum investment of Rs. 5,000.

·        Invesco India Contra Fund – It has secured a 5-year return of 21.6% and a 3-year return of 22.6% with a minimum investment of Rs. 1,000

·        Kotak India EQ Contra Fund – It has managed to get a 5-year return of 20.98% and a 3-year return of 22.3% with a minimum investment of Rs. 5,000

All of them provide similar returns, while Invesco is open to investing with Rs. 1000 only.

Why invest in contra funds?

Contra funds bring some significant benefits with their contrarian approach, which are as follows:

  • Contra funds taps ignored and underperforming companies, which are overlooked and underrated by most investors.
  •  Because investors do not like businesses with temporary issues, such businesses can earn strong returns and outperform the overall market simply because they are purchased when they are struggling with temporary matters.
  • Because such stocks already operate at a low price compared to their peers with similar business fundamentals, and they have a lesser downside risk of bearing losses if the market or the respective industry falls.
  • In times of market corrections and crashes, contra funds turn out to be an excellent diversification tool as they have a weak correlation with the overall market.
  • Contra funds are known to experience strong rallies when their temporary problems are solved, whether they are company-specific or industry-specific.

Who should invest in contra funds?

Investments in contra funds take some time to get out of trouble and start performing well again, giving them a long-term hold. Thus, contra funds are a no-no for traders and impatient investors who panic sell in bad news and are tempted to sell to cut further potential losses.

Contra funds are sweet and fruitful for those who can sit tight, control their nerves, and have patience until the business conditions improve and the stocks realize their true value. Sometimes, it takes a long time as things take longer to improve than previously anticipated.

Therefore, if you are someone who does not get scared when businesses face challenges, and you have the courage to walk through those challenges of businesses, which takes time to improve, contra funds can fetch you far better returns than the index, most alternative investments.

Taxability of contra funds

A significant part of contra funds goes to equities, which makes this fund an equity fund for its classification. And since it is considered as an equity fund, its gains are treated like gains on any other equity fund.

Short-term capital gains (gains realised within 1 year of investment) are taxable at 15% irrespective of the investor’s tax slab.

Long-term capital gains (gains realised after 1 year of investment) up to Rs. 1 lakh are tax-exempt, and such capital gains above the limit are taxable at 15% with no indexation benefit.

Dividends on such investments are taxable in the investor’s hands as per his/her tax slab.

Associated risks of contra funds

Contra mutual funds come with these risk factors :

·        No profits due to time constraint – Contra funds are purchased with a long time horizon, say 5 years, because they contain businesses with temporary troubles. But when the problems do not get solved in the stipulated time, fund managers exit the position to pursue better opportunities, which means that some investments are exited without a profit, leading to loss of opportunity cost.

·        Bearing of losses because the problem remains unsolved – The business problem which is believed to be solvable might get even bigger. This results in exiting the position on that equity at a loss to protect the capital and avoid further losses.

Consideration before investing in contra funds

Investing carelessly is no better than gambling, and what makes investing different is getting the right information and making informed decisions. Here are the things you should take into consideration before investing your money into contra funds :

·        Risk tolerance – As contra funds are equity funds, for the most part, you should be willing and comfortable to occasionally lose a small portion of your portfolio. If you cannot afford to bear risks and lose some of your money while aiming for better returns, contra funds is not for you.

·        Time horizon – Because contra funds invest in businesses that are not performing well at present, you need to understand that it takes time for such businesses to recover. And so, you should be willing to sit with patience for a few years for the businesses to solve the problems.

How to start investing in contra funds

There are two options available to start investing in contra funds, which are SIP and Lump-sum.

SIP (Systematic Investment Plan) enables you to pay a fixed amount of money every month towards a contra mutual fund, which helps you build a significant portfolio over a period of time.

Investing in Lump-sum makes more sense when you have a pile of cash to invest or cannot afford to pay a fixed amount of money every month.

INDmoney helps you invest in contra and other mutual funds, stocks, and more with ease, as it is fast, safe, and user-friendly. It brings to you various services and features to help you buy assets and make your investment journey better and less costly, such as global investments, robo-advisor, tax planning, insurance, advanced reports, zero brokerage on stocks and mutual funds, instant processing, portfolio tracking, wide range of equity and debt funds and their historic returns.

FAQs

What are contra funds?

Simply meaning, contra funds are mutual funds that invest in underperforming assets, mainly equities, facing short-term, solvable problems.

Are contra funds a good investment?

Contra funds are undoubtedly a good investment if you have a moderate appetite for risk and the patience to look at the big picture with a significant time horizon.

Should I consider investing in contra funds?

Suppose you want to invest in underperforming assets to be able to enjoy higher than average returns with a time horizon of, say, five years. In that case, contra funds are definitely worth the consideration.

What is the difference between value funds and contra funds?

The simple difference is that value funds invest in undervalued stocks (i.e., stocks trading at a discount than their value). In contrast, contra funds invest in underperforming stocks (i.e.,businesses which are facing short-term challenges).