What are Contra Funds?

1. Introduction

Contra funds are different from other funds due to their peculiar style of investing. Here the fund manager takes a contrarian point of view for an asset over a long-term period.

2. Meaning of Contra Fund

Fund manager focuses on investing against the prevailing market trend, in sectors or stocks that are performing poorly and selling them when they perform well. Intention is to identify neglected sectors / stocks that are under performing today, but have a potential of coming back and growing in the long term. For example, currently in the covid times, Aviation and Hospitality are ignored sectors. This is a temporary view and these sectors have the potential to bounce back and perform well in the long run.

3. Difference Between Contra Investing & Value Investing

In Contra investing the objective is picking stocks that are dumped by the market (available at a cheap price) in the short-term, but nonetheless have the potential to gain in the long-term. Such market trends are caused due to the herd mentality of the investors. Hence by doing so, contra investing aims at sailing against the tide by betting on "out of favour" stocks/sectors, in an attempt to gain in the long-term. SBI Contra and Invesco Contra Fund are the two examples of Contra Funds.

While Value funds emphasise on picking stocks or sectors, trading below their true/ intrinsic value. Such stocks see surge in their prices when investors start realising their true potential. Canara Robeco Value Fund, Tata Equity PE Fund are examples of Value Funds.

A fund house can either take a contra fund or a value fund, not both as per the Sebi recategorization of mutual funds.

4. Performance in Bear Market
Contra Fund’s portfolio is defensive and gives a better return on stocks that have given negative return during bear market.