Fund managers of mutual funds adopt different investing styles to achieve the investment objective of the scheme. Of these, the contrarian style of investing interests many investors. While the risks are high, this style of investing offers the investors an opportunity to earn superlative returns. Here, we will explore Contra Mutual Funds which follow the contrarian style of investing and talk about some essential factors that you need to know about these funds.
A Contra Mutual Fund invests against the existing market trends and purchases stocks which are not performing well currently. The fund manager takes a contrarian view of the stock when it is shunned by the investors and also when there is a superlative demand for the same. Both over-performance and under-performance lead to a distorted value of the asset which the fund manager tries to capitalize on. The core belief is that any exorbitant price of an asset will eventually normalize in the long-term once the existing triggers are mitigated.
The fund manager of a Contra Mutual Fund purchases stocks at a value lower than its expected value in the long-term. There can be times when certain sectors witness a slump due to the prevalent market conditions. A contra fund invests in stocks of companies from these sectors and holds on to them till the demand increases. It is important to note here that these funds tend to perform better over the long-term and are not ideal for short-term investments.
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While investment is all about patience, investing in Contra Mutual Funds requires a little more patience from investors. The reason is simple, these funds invest in stocks that are under-performing for various reasons. Hence, investors need to wait till the reasons fade away and the stocks start performing again in order to earn profits. Also, in the short-term, the risks with investing in a Contra Fund are higher as compared to investing in other companies from similar sectors that are performing well. A Contra Fund does not chase the momentum of the market or bet on the current favorite. On the contrary, it bets on the opposite – the underdog.
Hence, you should consider investing in a Contra Mutual Fund if you have a reasonable risk tolerance, an investment horizon of 5+ years, and tons of patience.
We always recommend investors to look at the past performance of the fund before investing. Additionally, here are some factors that you can consider before investing in Contra Funds in India:
Market Performance is Irrelevant
Unlike investing in growth stocks where the performance of the overall market determines the expected returns, in the contrarian style of investing, it is the performance of the selected stocks and the mitigation of the dampening factors which is more important. Hence, you can gain profits even if the overall markets are not doing well and book losses despite the markets being on an all-time high. It is important to keep yourself updated about the performance of the stocks that you are invested in.
Losses are possible
It is important to understand that investing in a Contra Fund is all about betting on under-performing stocks with the hope that they will perform better in the long-term. While higher returns are possible if the stocks live up to your expectations, you need to be ready for losses in case they don’t. Hence, you must invest up to 10% of your portfolio in Contra Funds.
Research the Fund Manager
The fund manager of a Contra Fund is crucial in the performance of the scheme since the choice of stocks depends on the fund manager’s assessment of the stocks. Hence, as an investor, you must ensure that you research the performance of the fund manager before investing.
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