Do you know about the contrarian strategy of investing? Contra mutual funds employ this unique strategy, which makes them different from other equity mutual funds.
Contrarian Strategy says: Go against the flow, buy when others fear, sell when others cheer & rock the market your way. However, it is not that simple & requires additional effort. Keep reading to cultivate a complete explanation.
Contra Mutual Funds: Meaning & Explanation
Contra Mutual Funds: The keyword here is “Contra,” derived from “contrast (the opposite idea)” – a fund that dares to invest against market trends and sentiments, embracing the opposite idea.
This investment strategy is called “contrarian investing“. Doesn’t it seem simple? While it sounds simple, it’s not. Relying solely on market trends is a bad approach & hence fund managers have to do some additional efforts.
How Do Contra Funds Work?
In contra mutual funds, fund managers identify undervalued stocks that are underperforming due to some temporary issues. Addressing these issues can improve stock performances and produce significant returns.
After composing a basket of these stocks, managers pool money from investors to invest hoping that the overall portfolio will perform well in the long run.
Features of Contra Funds
Each type of mutual fund has some distinct features and so do contra funds. Let’s have a look at its features.
A. Equity Nature– Contra funds invest 65% of the assets in equities and equity-related instruments. This feature makes them equity-oriented mutual funds.
B. Contrarian Strategy- As discussed above, contra funds employ a contrarian strategy of investing. It means they invest against prevailing market sentiments and trends.
C. Undervalued Stocks- Contra funds invest in undervalued stocks that are considered undervalued due to temporary issues that may be resolved shortly.
D. Long-Term Outlook- Contra funds typically have a long-term investment horizon. They aim to hold undervalued stocks until their value is recognized by the market, which might take time.
Benefits of Contra Mutual Funds
Let’s explore some of the main benefits of contra-mutual funds.
- These funds try to tap overlooked investment opportunities
- Contra funds aim to invest in stocks with the potential for higher returns
- These funds offer active management funds to reduce risks
- Contra funds may thrive in both market conditions – bullish & bearish
- Contra mutual funds offer transparency regarding their holdings, expenses and historical performance.
Risks Involved in Contra Funds
Contra funds also bring some risks. Have a look at some potential risks of contra funds.
A. Strategy Risk- Going against market trends can lead to periods of underperformance if the strategy fails to identify value in the selected undervalued stocks.
B. Management Risk- The success of contra funds is dependent on good management of the fund. A poorly performing manager may not effectively identify winning opportunities.
C. Short-term Volatility- Contra funds invest in undervalued stocks which can be more volatile than established and popular stocks in the short-term.
D. Potential For Losses- There is a possibility that the underlying reasons causing undervaluation to persist or worsen resulting in potential losses for the fund. However, it can be managed through diversification.
Taxation
As these funds are considered equity mutual funds, they are subject to tax similar to equity mutual funds.
A. Short-Term Capital Gains (STCGs): If you sell your investments before the holding period of one year, a tax of 15% will be deducted on gains on investments.
B. Long-Term Capital Gains (LTCGs): If you sell your investments after the holding period of one year, an LTCG of up to 1 lakh is tax-free. Over this amount, a tax of 10% will be deducted from gains on investments.
C. Dividend Income Taxes: Dividend income is now subject to tax in the hands of investors as regular income and taxed according to applicable income tax slab rates.
How To Invest In Contra Funds
Thanks to online investing platforms that made investing easy. Investing in Contra funds is only a few steps away.
- Register with any reputed online investment platform
- Open an account & complete KYC
- Select A Contra Fund
- Choose the mode of investment i.e. lumpsum or SIP Investment
- Make the payment
- Review the performance periodically
FAQs
Are Contra funds Good?
These funds are good for investors with a long-term investment horizon. In the short term, they may show volatility.
Are contra funds suitable for all investors?
No, Contra funds are best suited for patient investors who have a long-term investment horizon and are willing to tolerate short-term market fluctuations.
Do contra funds guarantee higher returns?
No, contra funds do not guarantee higher returns. However, they aim to invest in undervalued stocks with growth potential.
