What is a Contra Fund & how does it work?

Every individual has some financial goals that they wish to achieve in the long run. Some have short term goals like buying a luxurious car, while others have long term goals like retirement planning. Some individuals only invest because they want to save taxes. No matter what your goal is, if you do not have a financial plan, reaching that goal may seem impossible. Financial planning is something every individual should inculcate to manage their finances and make feasible investment decisions. Financial planning, tax planning and money management all go hand in hand. There are several investment schemes available in the market which might leave new investors confused as to which scheme to invest in. But if they have a financial plan and have prioritized their short term and long term financial goals, choosing the right investment scheme might become easier.

Once you know your goals, the next thing for an investor to do is determine their risk appetite. The investment market is flooded with schemes that may seem to carry similar traits, but vary in nature and risk profile. The last thing an investor wants is to put their hard earned money in a scheme that doesn’t match with their risk appetite. Investors who are entirely averse to taking risk may prefer investing their money in conservative schemes offering fixed interest rates. However, do bear in mind that every investment carries some amount of risk. You cannot call any investment a completely risk-free investment. So if you are someone who is keen on investing in market linked schemes and do not wish to settle with schemes offering fixed interest rates, you may consider investing in mutual funds.

What are equity mutual funds?

In the recent past, mutual funds have gained traction among both young as well as traditional investors. People are considering mutual fund investments not only because they carry a diversified portfolio, but also offer risk management by investment in multiple asset classes using mutual fund investment app. Mutual funds have been further categorized by SEBI depending on certain unique attributes like risk profile, investment objective, nature of the scheme, investment strategy, asset allocation, etc. Some of the major mutual fund categories include equity, hybrid, debt, retirement funds, children’s funds, balanced funds, ETFs, gold funds and index funds.

Equity funds are open ended mutual fund schemes that aim at generating capital appreciation by predominantly investing in equity and equity related instruments. Contra funds too come under equity schemes and are known for their unique investment strategy.

What are contra funds?

A contra fund comes under an equity mutual fund that follows a unique investment strategy. Of its total assets, a contra fund invests a minimum 65 percent in equity and equity related instruments. Contra fund is an open ended equity scheme which follows a contrarian strategy. Here the fund managers place their bets on those that aren’t performing well and are considered undervalued rather than focusing on those equities that seem to be promising at the moment.

How do contra funds work?

A contra fund works quite uniquely as compared to other mutual fund schemes. It follows a strategy that works on the assumption that the asset class in which the contra fund invests will improve at some point of time in future. Fund managers may be able to buy these undervalued securities at a good bargain. These investments are made keeping a long term investment horizon in mind. Hence investors with a short term investment horizon should reconsider investing in contra funds. Contra funds may or may not be favoured by all investors as they are following a strategy of investing in commodities and securities that have slumped. Though it is true that the performance of asset classes is never constant and fluctuates from time to time, some investors may not want to invest in a fund that is following a contrarian investment strategy.

Whether you invest in a contra fund or any other equity scheme, remember that investments made in mutual funds are exposed to market volatility and hence returns are never guaranteed. No matter which mutual fund you plan on investing in, make sure that you do adequate research about that fund before making the actual investment.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.