Are you aware of Contra Fund?

The mutual fund industry has a huge range of investments. It consists of many different types of funds. Each fund is formulated according to the needs of different types of investors. We are going to understand one such type of fund known as Contra Fund in the following article. We will read about definition, concept, return, taxation, benefits of contra fund.

Definition of contra fund

When you glance through the history of the Indian equity market, you will find that many underperforming stocks have turned to multi- baggers for investors. Experienced investors know stocks that are underperforming today can hold a huge potential in long run. This kind of fund that aims to deliver capital growth by investing in underperforming stocks are called CONTRA FUND. The investment strategy does not involve picking random underperforming stocks. 

Read also: Why are People Scared of Investing in Mutual fund or Stock Market in India?

What is the concept of Contra fund?

Investors are in the notion that investing in contra funds means investing in stocks that one would never want to purchase. But that is not the case. On the contrary, fund managers buy shares that are not recognized in the market but in the long run its value increases as the markets recover.

Contrarians believe that excess demand or no stock demand leads to imbalance and mispricing in the market. It’s the herd mentality that makes the investor buy the trendy stocks which in turn makes them overpriced. The contra fund managers go against this rule and purchase those shares that are underpriced and they capitalize their earning when the stocks give good returns in the long run.

For example: – Let’s assume that market news and people’s sentiments for Pharma sector is negative. A contra fund manager will buy stocks of fundamentally strong and undervalued stocks from this sector. When it’s time for a turnaround in this sector, pharma prices will rise and increase the value of the stocks and this is how the investor will earn.

What returns are expected out of contra fund?

Generally these funds have good growth potential, hence they can yield high returns. Contra funds are like your assets in long run. When the markets are stable, the investors get benefits from their increasing share prices, particularly higher returns can also be received if the stocks were bought at a lower price than the basic value.

Performance of few of the available contra funds in the market

What are the tax benefits of investing in contra fund?

Certain tax benefits are available of investing in contra mutual funds. The dividend earned from the contra funds is deductible from the investor’s taxable income, upto 1.5 lakh p.a. u/s 80C of Income Tax Act.

The capital gains earned on the resale of such funds is accountable under the income tax. On short term capital gains upto 36 months 15% tax has to be paid whereas only 10% is payable on gains made for more than 36 months. Tax deducted on capital gain is subject to indexation.

Read also: Taxation and Tax Saving Options in India

What are the benefits of investing in contra fund?

• By investing in contra funds, investors can make huge profits compared to standard equity mutual funds. Blue- chip companies have a glass ceiling on the growth of their share price so you cannot earn higher profits. On the contrary, the contra company’s price fluctuate at a higher rate.
• In contra funds, the minimum investment price is very low as they have not gained popularity. This enables you to make lower initial investment. When the price rises in the long term, you can make substantial gain form the same. Moreover, contra funds do not charge any entry or exit load which reduces the cost of investing. On the other hand, equity mutual funds have various added expenses making the fund a costly investment option.

Are contra funds right for you?

Though contra funds are capable of generating high returns for the investors but they come with high risk profile thus making these a high-risk-reward investment. Therefore it is best for the investor to evaluate that how much this fund will help him achieve his goals.

Moreover, it is also important to evaluate the fund manager and his past experience and performance during the downturns in the market. The investor should also research on the companies the fund invests in.

Due to immense research and analysis involved, contra funds are more suitable for aggressive investors with high-risk appetite.

FAQ

What is contra fund?

Fund managers buy shares that are not recognized in the market but in the long run its value increases as the markets recover.

Who should invest in Contra fund?

A person who has capacity of taking risk. Investment horizon should be 5 years and above.

How does a contra fund work?

Fund manager invests against the existing market trends and purchases stocks which are not performing well currently. 

What is Blue Chip Fund?

Blue chip funds are equity mutual funds that invest in stocks of companies with large market capitalization which are well-established companies with a track record of performance over some time.

Is it good to invest in contra fund?

Investing in contra fund gives you opportunity to gain higher return over long period. This type of fund can give you benchmark beating return.

Is Contra fund safe?

Contra funds are very risky. Contra funds may take years to show performance.