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Mutual funds are classified into several sub-categories based on the investment objective. One of the most interesting funds out of these categories is the Contra fund.
Imagine a sports team who’ve been unable to win in a long time. The owner loses faith in the team and decides to sell. But one person buys the team because of future potential.
Not just that, this person has a reputation for buying multiple underperforming teams and banking on future potential. Contra funds are known to do this. It is their investment objective!
Let’s understand contra funds in greater detail to find out if these funds can add value to your portfolio. Towards the end of this story, we’ll tell you the best way to invest in contra funds.
A contra mutual fund is an equity mutual fund. This means that a contra fund invests primarily in stocks. The orthodox approach would be to invest in the best-performing stocks.
But contra funds adopt a contrarian approach to investing in stocks. These funds buy underperforming stocks, including some stocks that give negative returns.
The logic? Future potential. Underperforming stocks can be bought for a low price. The value of stocks may plummet due to sectoral, political, or economic issues.
However, historical data suggests that it is possible to recover from these slumps over time. The fund manager will hold on to the stocks until they gain value or demand and sell them during a favourable market phase.
The future gains that the stock will make over the long term can offset the losses incurred during the investment journey. But all of this operates on delayed gratification and future potential.
Both of these concepts require patience, expert knowledge of the markets and a keen eye to spot potential. Thus, the track record of the fund manager becomes crucial to gaining value out of the investment.
1. Name derived from the “contrarian” investment approach
2. Equity funds that invest in underperforming stocks and sectors
3. Underlying principle belief is that crowd mentality leads to very high or very low stock prices
4. Suitable for the long term due to the underlying principle
5. There are only 3 contra funds available to Indian investors
Fun fact: A fund house can either offer a contra fund or a value fund but not both due to SEBI guidelines.
Contra funds are high-risk investments simply because they invest in stocks and sectors that are not doing well but may have future potential.
Thus, knowing your ability to take risks can be crucial to know whether you should invest in contra funds. There are two ways to identify your risk profile:
The benefits of taking the risk quiz on the Cube Wealth app extends beyond merely understanding whether you should invest in Contra funds.
Cube will also give you contra fund recommendations handpicked and curated by our wealth advisor, Wealth First, who has a track record of beating the market by ~50%.
Why is knowing your risk profile important? Watch this video to know more.
The fund manager’s judgment is crucial to identifying and investing in the right stocks for the future. This could be a make or break for the future potential of the contra fund.
Thus, researching the fund manager’s performance becomes important along with analysing the historical returns of the given contra fund.
But past performance can not guarantee future success. Having a proven advisor like Wealth First by your side can help you think ahead and invest in the right contra funds.
Watch this video to know why it is important to have a proven advisor
Contra funds buy stocks that operate in the fringes of the market spectrum. This is why the overall performance of the market is irrelevant to the value proposition of contra funds.
The individual performance of each stock matters which implies that there may be losses during bull markets and profits during bear markets.
Investors should be prepared for losses when investing in contra funds. The notional profits may be high and the losses can be hard on the pocket.
That said, investors with a long term goal in mind may allocate contra funds to their portfolio. Contra funds require above average patience purely due to their portfolio of underperforming stocks with potential.
Speak to a wealth coach before investing in any contra fund. A wealth coach can help you with a detailed analysis of your risk profile and investment goals that can tell you if contra funds are right for you.
The best way to invest in contra funds or mutual funds is by using the Cube Wealth app. Cube gives you access to handpicked recommendations from mutual fund experts, Wealth First.
Moreover, Cube’s advisor doesn’t just tell you when to buy a contra fund, they even tell you when to sell the contra fund at the right time. This can be very useful given the underlying principle of contra funds.
The Cube Wealth app also helps you invest in mutual funds in a straightforward and convenient way with the help of options like QuickSIP and SuperSIP.
Download the Cube Wealth app or speak to a wealth coach today to know more about investing in the best contra funds.
A snippet of contra funds currently being recommended by Wealth First:
Contra funds get their name from the contrarian investment style that they follow. A contra fund will invest in less desirable stocks and sectors that are underperforming but have future potential.
Thus, there are above average risks associated with contra fund investments. It is advisable to speak to a wealth coach before investing in any contra fund.
Ans. Contra mutual funds identify opportunities in undervalued or underperforming assets, sectors, or companies. Fund managers take positions that go against the current market sentiment, expecting a reversal in fortunes.
Ans. The potential benefits include the opportunity for higher returns when contrarian bets pay off, risk diversification, and a hedge against popular market trends.
Ans. Investors who have a moderate to high risk tolerance, a long-term investment horizon, and a belief in contrarian investment principles may consider investing in contra mutual funds.
Ans. Contra mutual funds can be riskier than conventional funds, as they bet against prevailing market sentiment. There's a risk that contrarian positions may not perform as expected, leading to underperformance.
Download the Cube Wealth app to know more.
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