Contra Mutual Funds bank on underperforming stocks to generate returns in the Indian equities market. These funds pick fundamentally strong stocks but trade at a relatively low price. The strategy is to invest early in these stocks for capital growth over time.
Currently, only three contra mutual funds are available in the market: the SBI Contra Fund, Kotak India EQ Contra Fund, and Invesco India Contra Fund.
Contra fund managers bet against the market trends and identify and pick inexpensive, unfavoured stocks, but fundamentally strong.
These funds can gain rapidly from undervalued stocks during market corrections. The Securities and Exchanges Board of India (SEBI) mandates them to invest at least 65 per cent of their total assets in equities and equity-linked products.
Performance
SBI Contra Fund returned a compounded annual growth rate (CAGR) of 30.84 per cent, Kotak India EQ Contra Fund generated a 19 per cent return, while Invesco India Contra Fund gave a 20.04 per cent return in three years. Of the three funds, SBI Contra Fund is the only one to invest in the debt market, with an 8.5 per cent capital allocation.
Risks Associated With Contra Funds
"Investors may face losses if the equities underperform the fund manager's predictions, and the contra view does not materialise," says Omkeshwar Singh, head of RankMF, Samco Group.
Contra funds presume that undervalued stocks would rise to their actual worth, though there is a risk that it may not materialise. "Contra funds are against the trend kind of investment style; therefore, the risk involved is the assumed value of an investment is not realised," said Omkeshwar.
SBI contra fund's returns are high; however, "the contra funds' historical performance is not so great except SBI Contra Fund, which has done a decent job, but it comes with high beta and standard deviation that increases the overall fund's risk." said Amar Ranu, head of investment products and advisory at Anand Rathi Shares & Stock Brokers.
Points To Remember While Investing In Contra Funds
If you aim to reduce the risks during periods of market overvaluation, investors should stay invested until the stocks reach their desired valuation. Hence, these funds suit investors with a high-risk appetite. “Seasoned investors wanting to buck the trend should invest for a minimum of five years,” said Omkeshwar.
The Upside Of Investing In Contra Mutual Funds
As contra mutual funds trade at discounts relative to their historical valuations, they can act as a hedge if the overvalued market goes through a correction.
“Since India is a growth consumption-led story, finding value stocks/sectors is challenging. However, at any point in time, a few sectors or stocks would always be undervalued or contrarian. For Example, commodity-led sectors or auto were undervalued 1-2 years back and played beautifully in the market. However, it is difficult to time these sectors, and one may not get the desired return if not captured properly,” Amar added.
