These funds follow a contrarian view and wager stocks that are expected to perform within the future. Contra funds are generally cyclical and generate high returns after a comparatively long gestation.
Factors for undervaluation could stretch from regulatory measures to business cycles or unexpected events which may have temporarily put the company’s performance fraught.
So, the fund manager tries to make the most of such investment opportunities with a research-based conviction.
Who Should Invest In Contra Funds?
Investors have to realize their risk profile and risk-taking capacity before considering contra funds. Besides, it also requires an understanding of investors’ investment behavior.
Such funds demand your patience, high shock absorption capacity, and willingness to speculate more if there’s further deterioration within the value of the fund’s assets.
Therefore, investors who have moderate to high-risk appetites, have time in hand, and may remain disciplined in their approach without pressing the push may go for contra funds.
Should You Invest In Contra Funds?
There would be continuous sharp ups and downs but you would be required to stay put during the journey. There could also be a possibility that the value of the investment goes below your costs several times.
Such phrases should be used to accumulate more units by way of additional purchase features, which in turn, helps in cost averaging.
For instance, contra funds from three large, well-known fund-houses have given one-year returns of 84.4%, 54.5%, and 57%, respectively.
For three years, returns stood at a compounded growth of 23.5%, 18%, and 18.1%, respectively, as per data available online on October 1, 2021.
However, there have been phases where these funds even lost over 30-40% of their values.
Precautions to want While Investing in Contra Funds
The Indian nondepository financial institution sector offers nearly 1500 schemes across the asset categories, there are only 19 contra funds currently available to investors. Since fewer in numbers manage relatively fewer assets, investors should exercise the following precautions before going ahead.
a)Past Performance: This helps understand the fund’s performance cycle investors get a decent idea of how long they need to remain in the fund.
b) Limit Your Allocation: Ideally, one should restrict allocation to contra funds at but a fifth of the investments.
c) Don’t Sell When Value Deteriorates: Conviction patiently may be a must while investing in contra funds. An investor should use such market conditions to shop for more to average the holding costs.
d) Book Profits When Cycles End: Contra funds might not be suitable to remain with beyond its outperformance upon completion of its performance cycle.
Contra Funds have the potential to feature significant value to your overall investment portfolio. However, they demand more patience and unshakeable conviction from investors thanks to their long biological time to get returns.
You consider contra funds if a seasoned investor who is well-versed with the market cycles and has relatively high risk-taking capabilities should move with contra funds.