Value Fund vs Contra Fund
Mutual funds are of various types. Types of mutual fund are decided on the basis of investment pattern and time horizon. Some fund invest in tried and tested large cap stock, debt market, fixed income investment options.
But few types of mutual funds have totally different investment pattern. Like value funds and contra funds are two examples.
Both funds invest in equity market. But both funds are little different from each other. Let’s discuss the difference between value fund and contra fund. We will start with definition of value fund, contra fund and then understand contra fund vs value fund.
What is Value Fund?
In case of value fund, fund manager invests in equity which are UNDERVALUED but possess a strong intrinsic value. Means, the stock is trading at value lower that its intrinsic value. So, fund manager believes that the same stock will go upward once market realizes its true potential. Few current examples of value stocks from Indian stock market are HPCL, Coal India etc.
For example, if some equity is valued Rs 100 but fund manager thinks that its worth 150 then he invests in such undervalued equity.
What is Contra Fund?
On the other hand, contra fund makes investment in UNDERPERFORMING stocks/equity. Fund manager buys shares that are not recognized in the market but in the long run its value increases as the markets recover. The investment strategy does not involve picking random underperforming stocks but this can turn out to be quite rewarding for investors if the fund manager’s call turns out to be correct. But it needs patience.
The fund manager analyses the market to identify fundamentally strong companies with a solid future potential even though they are currently underperforming.
Read more: Are you aware of Contra Funds?
Comparing Contra Fund Vs Value Fund
| Type | Contra Fund | Value Fund |
| Type of Mutual Fund | Equity | Equity |
| Invests in | UNDERPERFORMING STOCK | UNDERVALUED STOCK |
| Investment Horizon | Long Term | Long Term |
| Risk Profile | High | High |
So, both contra fund and value fund are high risk and long-term investments. Both types of equity funds need patience and commitment of 5 years and above.
Read more: A Beginners Guide to Systematic Investment Plan
Takeaway:
Now, we read definition of value fund, contra fund and their difference. Sometimes, contra and value funds are confused to be of same type of fund but they are very different in investment pattern. SEBI has issued a strict guideline to fund houses for both contra and value fund.
According to SEBI guidelines, a fund house can only offer a contra fund or a value fund but not both.
Look at the performance of these funds in one complete market cycle for evaluating these funds.
You can approach financial advisor too if you have any type of confusion. Financial advisor keep steady watch on market so financial advisor can guide you with all your queries.
FAQ
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 of Contra Mutual Fund invests against the existing market trends and purchases stocks which are not performing well currently.
Is it safe to invest in value fund?
Contra funds deliver healthy returns over the long term. So, investor who wants to invest in contra fund should be invested for long time.
When should you buy value funds?
During recession if you want to buy at really cheap rate.
Who should invest in contra funds?
Investor who is willing to take risk and a person who has investment horizon of 5 years and more can invest in contra fund as it invests in underperforming stocks.
Who should invest in contra funds?
These funds are best suited for those investors with an aggressive approach towards investing.
Is it good to invest in value fund?
Value funds deliver healthy returns over the long term. So, investor who wants to invest in value fund should be invested for long time.
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 Contra fund safe?
Contra funds are very risky. Contra funds may take years to show performance.
