Contra mutual funds are a particular kind of mutual fund that employs a distinctive approach to investing by acquiring undervalued or out-of-favor stocks. Contra is short for contrarian funds, as this type of mutual fund follows a contrary market outlook. Let’s understand this interesting category of funds, their characteristics, and some of the best contra funds in India.
Features of contra mutual funds
Equity mutual funds with a distinctive investment approach contra-mutual funds. The main characteristic of contra mutual funds is their investment in undervalued stocks. Finding companies with solid fundamentals that are currently trading at a discount is the goal of this contrarian investing strategy. A contra mutual fund manager will typically invest in businesses that are experiencing momentary setbacks, which can present opportunities for buying at a discount.
By investing in companies that are expected to perform well over the long term but may not be supported by the market in the short term, a contra-mutual fund seeks to generate alpha. For investors willing to take on more risk in exchange for potentially higher returns, contra-trading can present a compelling investment option.
Taxability is a significant factor that determines the attractiveness of an asset class. Let us discuss how profit from contra mutual funds is taxed.
Long-term capital gains tax applies for investments held for more than a year. An investor in a contra fund needs to pay long-term capital gains tax at the rate of 15% if profit exceeds ₹1 lakh a year.
If you invest in a contra fund for less than a year, then you have to pay short-term capital gains at the rate of 15%, irrespective of your tax slab rate.
Additionally, an investor needs to pay TDS at the rate of 10% for dividend payouts above ₹5,000.
Who is likely to benefit from investing in these funds?
Investors who are comfortable with greater risk and volatility in exchange for possibly higher returns should consider these funds. Since these stocks might take some time to reach their full growth potential, small-cap funds might be a better choice for investors with longer investment time horizons.
Benefits of investing in contra mutual funds
Investing in the best contra mutual funds has many benefits. Some of them are:
- High returns: Contra mutual funds are known for their high returns, which are attained by placing contrarian wagers. The fund manager adopts a different strategy from the market and makes long-term investments in undervalued stocks. Higher returns for the investor may result from this.
- Reduced risk: Because they invest in stocks that are undervalued and have room for future growth, contra trading can help in lowering investment risk. The fund manager invests in these stocks to lower the risk involved in stock market investments.
- Diversification: Investors can benefit from diversification by using contra-mutual funds. Since these funds invest in a variety of stocks, the risk is dispersed among numerous businesses and sectors.
- Professional management: Experienced fund managers who have the knowledge and expertise to make the best investment decisions usually manage contra mutual funds. They maintain a close eye on the market and act quickly to maximize returns.
- Transparency: Some of the top contra mutual funds are open and regularly update investors on their performance. Investors can keep tabs on the performance of the fund and decide for themselves whether or not to keep investing in it.
Top contra mutual funds
Let us take a look at the top 3 contra mutual fund schemes.
SBI Contra Direct Plan Growth
This contra mutual fund scheme comes from SBI mutual fund, one of India’s largest fund houses. The portfolio is largely conservative, with holdings concentrated in large-cap stocks and debt.
The fund holds 79.02% in Indian equities. Investments in large-cap stocks come to 40.34%, 11.76% in mid-cap stocks, and 16.41% in small-cap stocks.
The fund has given a 14.75% annualized return since its inception on 2 January, 2013. In short- to medium-term returns, the fund has given one-year returns of 16.7%, three-year returns of 30.24%, and five-year returns of 15%. The benchmark for the fund is S&P BSE 500 TRI index.
The fund has an expense ratio of 0.97% and does not have a lock-in period.
Kotak India EQ Contra Fund Direct Growth
Launched by Kotak Mahindra Mutual Fund, the fund was formerly known as Kotak Classic Equity Direct Growth.
In short- to medium-term returns, the fund has a one-year return of 8.6%. It returned 16.92% annualized for the last three years and 14.46% for the five-year period. The contra fund has given 15.2% annualized returns since its inception on 1 January, 2013.
The fund has an expense ratio of 0.81% and does not have a lock-in period. The scheme is benchmarked against the NIFTY 500 TRI index.
The minimum investment for SIP is ₹1,000 and for lumpsum investment, ₹5,000.
Invesco India Contra Fund Direct Growth
This is a mutual fund scheme from Invesco Mutual Fund. It is rated “very high risk.” The minimum investment in SIP is ₹500, and for lumpsum, ₹1,000.
Overall, the contra fund has 96.34% investments in Indian equities. The fund holds about 58.55% in large-cap equities, 10.27% in mid-cap equities, and 13.37% in small-cap equities.
In the medium term, the fund returned 5.6% for the one-year period. It has returned 15.79% annualized for the three-year period and 12.48% for the five-year period. The fund had its launch on 11 April, 2007 and has given annualized returns of 13.77% since inception. The fund is benchmarked against S&P BSE 500 TRI.
Which contra fund is best?
Determining the best contra fund depends on individual investment goals and risk tolerance. Consider options like SBI Contra Fund, Kotak India EQ Contra Fund, and Invesco India Contra Fund, and consult a financial advisor for personalized advice.
Is contra mutual fund good?
Contra mutual funds can be beneficial for investors seeking opportunities in undervalued assets, offering potential growth. However, their performance depends on market conditions and fund management expertise.
What is an example of a contra fund?
An example of a contra fund is the SBI Contra Fund, which aims to invest in undervalued stocks with the potential for growth while maintaining a contrarian investment approach.
Which contra fund is best in India?
The SBI Contra Fund is considered one of the best contra funds in India, aiming for capital appreciation by investing in undervalued stocks with growth potential.