But you believe, deep down, that in a year or two, these items will be in high demand again.
So, you purchase them now at a discount, hoping to sell them later at a higher price when everyone wants them. This is the basic idea behind a contra fund.
A contra fund is a type of mutual fund that follows a contrarian investment strategy.
Fund managers invest in stocks that are currently undervalued or out of favor with the market, with the expectation that these stocks will bounce back over time, yielding significant returns.
How Does a Contra Fund Work?
Let's break it down step by step:
1. Identifying Undervalued Stocks: Fund managers of contra funds look for companies that are underperforming, possibly due to temporary market conditions or a downturn in their sector.
These stocks are undervalued because most investors are avoiding them making them cheaper to buy.
2. Contrarian Approach: While the rest of the market might be flocking to popular, high-performing stocks, contra fund managers deliberately choose to invest in those that have low demand.
It's a bit like betting against the crowd, with the belief that the chosen stocks will eventually recover.
3. Long-Term Horizon: Contra funds require patience.
These undervalued stocks don't turn profitable overnight.
Typically, you need to stay invested for a longer period (5+ years) to see substantial growth.
This makes contra funds more suitable for investors who can withstand volatility and are willing to wait for potential returns.
Why Should You Invest in Contra Funds?
There are several reasons why investors are drawn to contra funds:
Potential for High Returns: When these undervalued stocks eventually bounce back, they have the potential to offer substantial gains, especially compared to more traditional funds.
Diversification: Contra funds can offer a unique angle to diversify your portfolio.
They often invest in sectors or stocks that are underrepresented in other mutual funds, providing a balance to your overall investments.
Long-Term Growth: If you're in for the long haul and have a higher risk tolerance, contra funds might fit your strategy well.
They perform best over extended periods.
Are There Any Risks?
Yes, contra funds are not for the faint-hearted. Since they invest in stocks that are not currently performing well, there’s a risk that some of these stocks may never recover.
The timing of when these stocks will bounce back is also uncertain.
So, this is a high-risk, high-reward type of investment, which is not ideal for short-term or conservative investors.
Contra Funds vs. Regular Equity Funds
Regular equity funds often aim to invest in high-growth sectors or popular stocks with a proven track record of performance.
Contra funds, on the other hand, take the opposite approach, seeking undervalued and out-of-favor stocks, which may have the potential to turn around in the future.
Who Should Invest in Contra Funds?
If you:
Are willing to invest for the long term (5+ years).
Have a higher risk appetite.
Believe in the contrarian approach of buying low and selling high.
Then contra funds might be a great addition to your portfolio.
They aren’t for everyone, though. Conservative investors who can’t stomach the risk or the potential waiting time might want to explore other types of mutual funds, such as large-cap or balanced funds.
How to Invest in Contra Funds
Investing in contra funds is just like investing in any other mutual fund. You can invest through our App or website.
Examples of Popular Contra Funds in India
Here are a few well-known contra funds in India:
SBI Contra Fund
Kotak India EQ Contra Fund
Invesco India Contra Fund
Each of these funds follows the same basic principle but may differ in sector allocation and stock selection.
Note: These funds are not any recommendations. Please contact your distributor before investing.
Conclusion
To sum up, a contra fund is for those who believe in swimming against the tide—buying when others are selling and holding on for the long term.
If you're patient, willing to accept risks, and looking for a different way to diversify your investments, this fund could be your hidden gem.
Always consult an expert before making any investment decisions, as contra funds are best suited for those who understand their higher risk and longer time horizon.
By now, you should have a good understanding of how a contra fund works and whether it aligns with your investment goals.
