What are contra mutual fund schemes?

Even when he did not know much about the markets, Alok was known for having a contrarian view on the happenings in the economy. While his friends would follow the trends and believe in them, Alok would always undertake his own research and usually come up with a perspective different from the popular one. For instance, during the technology and IT sector boom of 2015, Alok strongly maintained that the sector would trend downhill over the next few years, and his contrarian view did come to fruition, despite the many experts who professed otherwise. If you are similar to Alok, or believe that contrarian views about the market have merit, then a contra fund is a great option for you. While most mutual funds, including index funds, equity funds, debt funds, passive debt funds and passive equity funds follow the larger trend depicted by the market, contra funds prefer to take an alternative view, and have the potential to offer robust returns, if the call is proven right. Read on to get answers to questions such as what are contra funds and what is contra fund in mutual funds.

What are contra mutual funds?

To address the aspect of contra fund meaning, let us look at what these schemes refer to. A contra mutual fund actively opposes prevailing market trends by acquiring stocks currently underperforming. The fund manager adopts a contrarian perspective, taking note of stocks shunned by investors or experiencing high demand. Both over-performance and under-performance contribute to an altered asset value, which the fund manager seeks to leverage. The fundamental belief is that excessively high asset prices will eventually normalise in the long term once underlying triggers are addressed. In this strategy, the fund manager of a contra fund purchases stocks at a value lower than their anticipated long-term worth. During periods of sectoral downturns caused by prevailing market conditions, the contra fund invests in stocks from these sectors and retains them until demand rebounds. It is crucial to emphasise that these funds generally exhibit superior performance over the long term and are not well-suited for short-term investments.

Who should invest in contra mutual funds?

Now that you have an idea about the concept of contra funds, should you invest in these schemes? A contra fund is well-suited for investors with long-term horizons and the patience to wait for the contrarian view to pan out in full – this usually requires more patience than what is exhibited by regular investors. Additionally, contra mutual funds are better suited for long-term investors as, in the short duration; these schemes may witness their value dropping in line with the ongoing trend. Therefore, if you lose patience and pull out your money in such scenarios, you may end up losing your hard-earned wealth. Given that these schemes tend to invest in the underdogs of the market, they are only suited for investors who are bullish on the contrarian view and have the wherewithal to wait for potential returns. Accordingly, investors with a moderate to high risk appetite, and an investment period of over 5 years, can consider adding these schemes to their portfolios, making contra funds a niche choice. 

Factors to consider before investing in contra mutual funds

Before you invest in a contra fund, through either the SIP (systematic investment plan) or lumpsum route, it is advisable to assess the fund's past performance and consider several key factors. Unlike traditional growth stock investments where overall market performance significantly influences returns, a contra mutual fund follows a contrarian style, placing greater emphasis on the selected stocks' performance and the mitigation of dampening factors. This approach allows for the potential of profit even in unfavourable market conditions or the possibility of losses during market peaks. Staying informed about the performance of the invested stocks is crucial in this strategy. Investors should also understand that these funds bet on underperforming stocks, with the anticipation that they will yield better long-term results – while higher returns are plausible if expectations are met, it is essential to be prepared for potential losses. Consequently, financial experts recommend limiting investments in such schemes to around 10% of your portfolio to manage risk effectively. Moreover, the role of the fund manager is pivotal in these funds, as stock selection hinges on their assessments. Thus, investors must conduct thorough research on the fund manager's performance before committing to investment decisions.

When Alok started investing in mutual funds, he preferred to allocate a portion of his corpus to contra funds, given that his perspective aligned with that of these schemes. However, his friends chose to invest in sectoral and thematic funds which were performing well at the time of investment. Neither of these styles is wrong – the optimal option for your portfolio depends completely on your unique investor profile. So make sure to assess your profile before you invest in contra funds to ensure positive outcomes.

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