A comprehensive guide for understanding Contra funds
The Contra fund true to its name describes a kind of investment fund whose USP is to adopt a contrarian view of the market sentiment. It is not an arbitrary contrarian viewpoint but is a finding based on well-researched and analysed market date as well as company data.
A Contra fund holds the belief that when the stock market sentiment is running against an industry or company, the assets are undervalued and worth investing in. So when everyone else is burning their bridges with that company and selling off their stock, a Contra fund decides this is the ideal time to purchase or buy the company’s shares at low prices. The adverse market conditions will lower the share price of that company, much under its comparable value or real value. Thus, creating an undervalued asset. Investing in these undervalued assets will generate higher than average returns on investments in the medium to long-term period.
Investors in Contra funds believe that there is a herd mentality that is followed by people in the stock markets. This means that if some investors consider a certain stock as lucrative everyone else rushes to buy it, and the stock gets overvalued and expensive. Similarly, if some people start divesting of shares of a certain company, then others will follow suit without any real evaluation of the company itself.
This creates an opportunity for the savvy investor who can swoop in and buy up these under-priced and potentially high return giving assets. The Contra funds pride themselves on being that savvy investor with an eye to spotting these underperforming stocks or sectors. The Contra fund is managed with the underlying assumption that the asset will stabilise and come to its real value in the long-term.
Who are the investors that Contra funds are suitable for?
Investments in Contra funds are suitable only for a particular kind of Investor. They are suitable for knowledgeable investors who can understand the macro trends prevailing as well as risk-taking investors. The investors should also be ones that are investing in medium to long-term. As in the short-term, the stocks that are out of favour or in a slump will not be generating returns soon.
The Contra funds can be used as a diversification opportunity by investors who can invest about 10-15% maximum of their investments in this category.
Examples of Contra investing
Contra funds are basically part of the diversified equity investing strategy, with the difference being the manner of investing. A prominent example of a contrarian investor is Warren Buffett - to quote him "Be fearful when others are greedy, and greedy when others are fearful".
For instance, when the commodities market is taking a hit is when the contrarian fund advisor will come in and cherry-pick stocks at low prices. Similarly, a Contra fund will pick IT stocks even as the rupee strengthens – despite the fact that it strains the margins of those companies. In the past, experts have held a contrarian view on telecom stocks for a two-year period.
How to choose a Contra fund?
When you decide to invest in a Contra fund, you cannot simply look at past returns and make your decision.
You should definitely choose an old fund that has experience and has lasted. You should also know that different Contra funds have different mandates of the fund and the general themes or sectors that it invests in. If they suit your own mindset, then it’s a good fund for you. So research on their past investments and draw up a picture.
The fund manager is the most important. You should be comfortable with his ability to gauge the real worth of companies and be able to stomach the decisions taken with your investments.
ING Contra, L&T Contra, SBI Magnum Contra, Kotak Contra, Tata Contra, UTI Contra and Religare Contra are some of the examples of known Contra funds in the Indian market. These funds have given returns that have been between 8.5 and 14 per cent over two years. Tata Contra and Religare Contra have given exceptional returns of over 20 per cent each. In comparison, the BSE Index has shown a return of 12-13%.
Have a look at how to choose a suitable equity mutual fund since the benefits of investing in Contra funds are genuine if you can sustain the risk.