Mutual fund managers use several investing strategies to meet the scheme’s investment goals. Many investors are attracted to the contrarian investing style. Despite the high risks, this type of investing provides investors with the opportunity to achieve excellent profits. Here, we’ll look into Contra Mutual Funds, which follow a contrarian investing strategy, and discuss some key points to keep in mind before investing in these funds.
Contra Mutual Funds
Contra is short for “contrarian,” Contra Funds are equity mutual funds that take a different side of the market. These are investment strategies in which fund managers search out cheap stocks rather than investing in good equities to boost the former’s long-term returns. These aren’t short-term investments, nor are they equivalent to value funds.
Contra Mutual Funds working
When the fund managers buy shares, the market does not acknowledge them, where Contra Funds come in. In the long run, as markets recover, prices may rise. According to contrarians, exuberant stock demand, or a lack thereof, leads to market mispricing and imbalance. Investors have a fantastic mentality when buying trendy stocks, which causes them to be expensive.
As a result, instead of buying such shares, Contra Fund managers are going against the trend. They expect a drop in overvalued resources, which they will profit from when their worth is realized by earning handsome returns on the underperforming equities they purchased.
Advantages of Contra Mutual Funds
The following are the main advantages of investing in hedge funds:
- The fund manager looks out and invests in firms that are inexpensive but have excellent fundamentals. This provides you with the possibility to make significant long-term profits.
- During a bull market, the contra funds can beat the market.
- Investing in these funds could protect you from a market drop.
Contra Mutual Funds Include Risks
There is also the risk of a ‘price trap,’ in which funds will tend to slide lower in the belief that they will have a better value option in the future. Funds that failed in negative markets continue to underperform in positive markets, and they may not expand even if all other equities do well. In this situation, the fundamental assumption is that assets would reach their true worth may be incorrect.
As a result, investing in Contra Funds requires extensive research and analysis. However, it is less unpredictable if the market falls and poses a lower risk than the overall market because investors have already lost market share.
Precautions before investing in Contra Mutual Funds
Despite the reality that the Indian mutual fund industry offers approximately 1500 plans over investment, there are now only 19 contra funds available to investors. As there are fewer of them handling fewer assets, investors should take the following measures before investing.
- Limit Your Allocation: Generally, contra funds should comprise not more than a fifth of your overall portfolio. Given their risk appetite, high-risk takers who are experienced investors may pick a higher level of access.
- Profits from the Book When Cycles End: Contra funds may not be suitable for long-term investment after their earnings growth cycle has ended. The creation of wealth is facilitated by proper repayment from contra funds. When it comes to redemption, get guidance from your advisor or account manager.
- Previous Performance: Before investing in a contra fund, investors should review the fund’s past performance. This helps investors understand the fund’s performance cycle and gives them a good idea of how long they should remain.
Reasons to invest in Contra Mutual Funds
- Identifies and invests in newly discovered or cheap investment opportunities.
- It can be used as a helpful hedge against market corrections when markets are overvalued.
- Contra funds have a lower downside risk than other large-size, multi cap, midcap, and other equity fund types since their portfolio elements trade at a discount to their previous valuations.
Contra Funds can substantially boost the value of your total portfolio. Due to their long period to generate returns, they require much more patience and unshakeable faith from investors. If you are an experienced investor familiar with market cycles and has a high-risk tolerance, you should explore contra funds.