Whether to invest in a contra fund or value fund is an important question that needs to be answered for every investor. The importance of this question lies in the fact that it determines the strategy and the investment rationale for any particular investment.

On a very basic level, value funds and contra funds are guided by 2 very different philosophies.

Value funds seek to invest in undervalued stocks based on price and evaluation, taking into account fundamental characteristics.

On the other hand, contra funds seeks to pick under-performing stocks and/ or sectors at a cheap valuation, which are likely to perform well in the long term.

What are Contra Funds?

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Investors invest in stocks that are not performing very well at that particular point in time. These stocks are generally not chosen for investment by a vast majority of investors.

Contrarian investing involves investing in neglected stocks which have strong asset value and fundamental attributes as well as focusing on under-owned sectors which have high potential.

In these funds, the assets usually perform poorly, which leads to distortion in valuation. This is what a contra fund seeks to capitalize in the long-term investment duration.

The underlying philosophy behind investing in contra funds is that, once the short-term concerns plaguing it are mitigated, the asset will go back to its real value which is much higher than the current value.

The idea is to buy assets at a cost lower than its fundamental value for the long term.

What are Value Funds?

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Value funds, as the name suggests, follow the value investment strategy. In this case, the fund manager usually invests in stocks which he/she believes are undervalued in price based on fundamental attributes at the time of investing and have great future potential.

Value funds or value investing is based on the philosophy that the market has some inefficiencies. Thus, on account of various reasons, some stocks trade at levels below what they are actually worth.

Fund managers who invest in value funds or follow the value investing strategy are usually skilled in identifying the market inefficiencies and potentially undervalued stocks.

The essence of such an investment is that, once the market corrects the inefficiencies in the underlying stocks, the value investor is set to gain from an increase in the price of the particular stock.

Value investing is popular among many fund managers and investors alike. The art of identifying undervalued stocks requires high skill and years of experience and expertise.

Contra funds vs Value funds

Investing in contra funds is often confused with investing in those stocks that no one would ever want to buy.

Whereas, value stocks may be identified as those which have good business fundamentals, similar to a bluechip company.

More often than not, bluechip companies which have good business fundamentals seem out of place in a contra fund. However, contrary to popular opinion, contra funds also buy the best and most fundamentally sound businesses.

These funds usually have a list of companies that they believe are fundamentally sound and they wait for those companies to either fall on some company-specific bad news and then buy these stocks.

This could be something like an earnings miss vis-à-vis the market expectation, or a setback in business which is not of a permanent nature.

Therefore, both value funds and contra funds can invest in sound businesses, depending upon the phase of the business and the price of the underlying stock.

Best Contra Category Funds

Kotak Classic Contra Fund
Fund Name 1Y 3Y 5Y Expense Ratio Turnover Ratio Category Risk
Invesco India Contra Fund - Direct - Growth -1.84% 16.05% 18.02% 0.96% 22% Equity
(Contra)
Moderately High
Kotak Classic Contra - Direct - Growth 4.9% 16.91% 13.88% 1.12% 46% Equity
(Contra)
Moderately High

1.Invesco India Contra Fund

This is one of the most popular funds in the contra category. Rated 4-star by Groww, it is a fund with moderately high risk and has given a return of 23.4% over 5 years.

Invesco India Contra Fund: Investment Objective

The investment objective of this scheme is to generate capital appreciation through investment in equity and equity related instruments. The Scheme will seek to generate capital appreciation through means of contrarian investing.

Invesco India Contra Fund: Details

AUM ₹ 919 Cr.
NAV ₹ 46.8 (as on 23rd October, 2018)
Minimum SIP Investment ₹ 500
Expense Ratio 0.98%
Returns 1 Year 1.3%
Returns 3 Years 13.3%
Returns 5 Years 23.4%
Risk Grade Moderately High Risk
Benchmark S&P BSE 500 TRI
Exit Load 1% if redeemed before 1 year
Fund Manager Amit Ganatra, Taher Badshah

This fund primarily invests in large-cap and mid-cap companies in the equity asset class. Large-cap stocks from a major 70% of the portfolio.

The equity investment is well diversified across various sectors. Some of the prominent ones are- Financial services (31%), Energy (14%), Automobile (14%), IT (11%), Consumer goods (8%) and others.

Some of the biggest holdings of this fund are- HDFC Bank (7.4%), Reliance Industries Limited (6.8%), HDFC Limited (5.8%), Infosys (5.6%), ICICI Bank (4.7%), ITC Limited (4.6%), L&T Limited (4.3%) and others.

Thus we can see that the fund has a good amount of the total exposure in bluechip stocks with very strong business attributes.

2.Kotak Classic Contra

This is another popular fund in the contra category. This fund with moderately high risk and has given a return of 15.4% over 5 years.

Kotak Classic Contra Fund: Investment Objective

To generate capital appreciation from a diversified portfolio of equity and equity related instruments.

Kotak Classic Contra Fund: Details

AUM ₹ 140 Cr.
NAV ₹ 49.7 (as on 23rd October, 2018)
Minimum SIP Investment ₹ 1,000
Expense Ratio 1.76%
Returns 1 Year -0.5%
Returns 3 Years 11.0%
Returns 5 Years 15.4%
Risk Grade Moderately High Risk
Benchmark NIFTY 100 TRI
Exit Load 1% if redeemed before 1 year
Fund Manager Deepak Gupta

The Kotak Classic Contra fund primarily invests in large-cap companies in the equity asset class. Large-cap stocks from a major 76% of the portfolio.

The equity investment is well diversified across various sectors. Some of the prominent ones are- Financial services (22%), Consumer goods (21%), IT (18%) Energy (12%), Automobile (9%) and others.

Some of the biggest holdings of this fund are- Reliance Industries Limited (6.4%), HDFC Bank (5.4%), HDFC Limited (5.8%), Infosys (5.2%), TCS (5.2%), HUL Limited (4.3%) and others.

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Best Value Category Funds

aditya birla sun life value fund
Fund Name 1Y 3Y 5Y Expense Ratio Turnover Ratio Category Risk
Aditya Birla Sun Life Pure Value Fund - Direct - Growth -20.07% 8.68% 12.18% 0.93% 126% Equity
(Value)
Moderately High
HDFC Capital Builder Value Fund - Direct - Growth -1.86% 14.16% 13.93% 0.92% 40% Equity
(Value)
Moderately High

1.Aditya Birla Sun Life Pure Value Fund

In the value funds category, Aditya Birla Sun Life Pure Value Fund is one of the most rrecognizedand one of the best performing funds.

Value funds seek to invest in stocks which are undervalued in price and have sound business fundamental attributes.

Aditya Birla Sun Life Pure Value Fund: Investment Objective

The objective of the Scheme is to generate long-term growth of capital by investing in a portfolio of equity and equity related securities. The Scheme would follow an investment strategy that would take advantage of Special Situations and Contrarian investment style.

Aditya Birla Sun Life Pure Value Fund: Details

AUM ₹ 1,456 Cr.
NAV ₹ 52.2 (as on 23rd October, 2018)
Minimum SIP Investment ₹ 1,000
Expense Ratio 1.21%
Returns 3 Years 9.1%
Returns 5 Years 24.5%
Risk Grade Moderately High Risk
Benchmark NIFTY 100 TRI
Exit Load 1% if redeemed before 1 year
Fund Manager Mahesh Patil, Milind Bafna

The Aditya Birla Sun Life Pure Value Fund primarily, true to its theme of investing in pure value stocks, invests a major portion of its AUM in mid-cap companies in the equity asset class.

The equity investment is well diversified across various sectors. Some of the prominent ones are- Energy (16%), Pharma (11%), Chemicals (10%), financial services (8%), Consumer goods (8%), IT (8%), Automobile (7%) and others.

Some of the biggest holdings of this fund are- HPCL Limited (5.1%), Tata Global Beverages (3.3%), Lupin Limited (2.6%), MRF Limited (2.6%), India Cements Limited (2.4%), Petronet LNG Limited (2.4%) and others.

2.HDFC Capital Builder Value Fund

This is another popular fund which has delivered significant returns and generated huge wealth in the value fund category.

This 4-star rated fund by Groww, falls in the moderately high-risk category and commensurate to the risk level, has given a return of 18.5% over 5 years.

HDFC Capital Builder Value Fund: Investment Objective

The fund plans to achieve capital appreciation in fixed period of time by investing predominantly in equity oriented securities.

HDFC Capital Builder Value Fund: Details

AUM ₹ 2,.310 Cr.
NAV ₹ 281.2 (as on 23rd October, 2018)
Minimum SIP Investment ₹ 500
Expense Ratio 0.92%
Returns 3 Years 10.8%
Returns 5 Years 18.5%
Risk Grade Moderately High Risk
Benchmark NIFTY 500 TRI
Exit Load 1% if redeemed before 1 year
Fund Manager Miten Lathia

Large-cap stocks account for approximately 65% of the total AUM of this fund.

The equity investment is well diversified across various sectors. Some of the prominent ones are- financial services (32%), energy (15%), consumer goods (10%), IT (9%), pharma (7%) and others.

Some of the biggest holdings of this fund are- HDFC Bank (8.8%), ITC Limited (4.8%), Reliance Industries Limited (4.3%), Yes Bank Limited (3.9%), Infosys (3.9%), IndusInd Bank (2.9%), and others

Conclusion

Contra and value funds belong to the equity category of mutual funds. These funds have 2 opposite or contrary philosophies for selecting and investing in a particular stock.

Contra funds invest in stocks which are usually not popularly invested in, due to bad business cycle or other company specific factors.

As mentioned above, it entails high risk and therefore should only be added to the portfolio from the perspective of diversification.

Contrary to contra funds, value funds invest in funds which have high growth potential and a sound business. Even these funds fall under the moderately high-risk category.

Nowadays, many investors look at investing their money in value funds. These stocks, when selected after due diligence and research can turn out to be multi-baggers in the medium to long term investment duration.

Therefore, looking at your investment philosophy and risk appetite, you can choose the better category of mutual fund for yourself.

Happy I nvesting!

Disclaimer: the views expressed here are of the author and do not reflect those of Groww.