Contra funds have an unconventional perspective on a company or asset. They make investments in companies that other investors are either ignoring or are probably going to reverse course on. Identifying a turnaround story early on and purchasing equities like SBI mutual fund at a discount to their prospective returns are the primary goals of these funds.
Let’s use an example to better grasp this.
For obvious reasons, hotel stocks performed poorly during COVID-19. Lockdowns were implemented, and many refrained from traveling. Investors with a contrarian mindset would have examined the prices of these equities and purchased ones that were at a discount.
Nonetheless, the fund manager has the authority to interpret Contra stocks since there is no universally accepted definition of them. Furthermore, value investing and this investment approach are really similar. Additionally, according to SEBI norms, a fund company may offer its investors a value fund or a contra fund in order to clear up any misconception. Thus, it is reasonable to presume that they are connected.
Who ought to purchase Contra Mutual Funds?
Although investing is all about patience, investors need to exercise a bit more patience when investing in Contra Mutual Funds.
The explanation is straightforward: these funds make investments in underperforming equities for a variety of reasons. Therefore, in order for investors to make money, they must wait until the causes subside and the equities begin to perform well once again. Additionally, investment in a Contra Fund carries more short-term risk than investing in other well operating businesses in comparable industries. A Contra Fund doesn’t follow the market’s momentum or place bets on the front-runner. Conversely, it places a wager on the underdog.
Therefore, if you have a long investment horizon (five years or more), a moderate risk tolerance, and a lot of patience, you should think about investing in a Contra Mutual Fund.
Things to think about when purchasing Contra Mutual Funds
Prior to making an investment, we always advise investors to review the fund’s historical performance. In addition, you may want to think about the following things before making an Indian Contra fund investment:
The Performance of the Market Is Not Important
In the contrarian method of investing, the performance of the chosen companies and the mitigation of the dampening variables are more significant than when investing in growth stocks, where the performance of the market as a whole dictates the projected returns. As a result, even in situations when the markets are performing poorly generally, you may still make money and even record losses while they are at an all-time high. It is critical that you stay informed about the performance of the equities in which you have invested.
Losses are Conceivable
It’s critical to realize that investing in a Contra Fund essentially entails placing bets on underperforming equities in the hopes that their performance would improve over time. Even while you could get better returns if the stocks meet your expectations, you should be prepared to lose money if they don’t. It follows that you have to allocate up to 10% of your portfolio to Contra Funds.
Examine the Fund Manager
Since the selection of stocks in a Contra Fund is based on the fund manager’s evaluation of the companies, the fund manager plays a critical role in the scheme’s success. Thus, before making an investment, it is essential that you, as the investor, thoroughly investigate the fund manager’s track record.
SBI contra fund has been a bright star in recent years, generating consistently impressive returns. The fund has a stellar three-year Compound Annual Growth Rate (CAGR) of 39% as of August 31, 2023. Investors have been enticed by such astounding gains. By August 2023, its Assets Under Management (AUM) had skyrocketed to an incredible Rs. 14,607 crores from about Rs. 1,300 crores in August 2020. This is an astounding 1,000% rise, or a tenfold increase.