Contra funds are a type of equity mutual funds that invest mainly in stocks. These funds follow a contrarian approach to the market. In other words, Contra fund managers go against the current market trends. They look for undervalued stocks that have strong fundamentals yet are not favoured by the market. These stocks are often available at lower prices and therefore contra funds can gain from sharp increases in the prices of these stocks when the market recognises their value.
How to invest in contra funds?
Here are a few steps to follow:
- Register online on your preferred mutual fund website or app.
- Choose the contra fund you want to invest in.
- Click on invest and choose the amount and mode of investment (SIP or lumpsum).
- Provide your KYC details (PAN and bank details) and complete your investment.
Who should invest in contra mutual funds?
Contra mutual funds are suitable for:
- High risk investors: It is suitable for investors with a high-risk appetite since all these funds are underperforming stocks but have the potential to grow over time. Since these funds are based on a possibility, they can be vulnerable and face fluctuations.
- Long term investors: It is best suited for investors who can invest for the long term. Since it is a fund that looks forward to the future, it can do well for those who remain invested for a long tenure.
Factors to consider before investing in contra funds.
You must consider these factors before you choose the best contra funds for your portfolio:
- Tenure of the investment: These funds are estimated to perform well in the future, which means you will have to be invested in this investment for the long term.
- Risks: Even the best contra funds come with high volatility. It is known to see frequent price fluctuations. Therefore, do not worry when you notice fluctuations in the price.
- Expense ratio: The managing company will levy you with a certain amount of fees and charges to manage the fund effectively. You will have to be aware of these fees to estimate the correct returns you will make.
Risks of investing in contra mutual funds
The major risks associated with the contra funds category are:
- They are based on estimations: These funds invest in undervalued stocks , anticipating they will do well in the future.
- It is for expert investors: Investors new to the investing environment need more expertise to invest in these stocks; they are most suitable for experienced investors skilled in research and analysis.
- It is based on the fund manager’s expertise: The fund manager used to make investment decisions. You may experience losses if the fund underperforms against predictions.
Taxation on contra funds
Contra funds invest in equities and hence , they are taxed like any other equity mutual funds. Investors have to pay taxes on the dividends they receive from mutual funds at their respective slab rates. Short-term capital gains earned on selling fund units are taxed at a rate of 15% irrespective of investors’ income tax slab rate. Long-term capital gains (realised on selling fund units after one year of holding) of up to Rs. 1 Lakh a year are made tax-free. Any gains exceeding this are taxed at 10%, and there is no benefit of indexation provided.
Advantages of contra funds
Here are some advantages of investing in contra funds:
- Has higher chances of gaining positive returns since selected stocks have sound fundamentals and are purchased at a lower cost.
- Comes with lower downside risk in comparison to large cap, multi-cap, mid-cap and other equity funds. This is because the stocks in a contra fund trade at discounts relative to their historical valuations.
- This Contra Fund has a very low minimum investment requirement, making it easy for retail traders to invest.
Thus, contra mutual funds are a great way to invest in undervalued stocks that have the potential to grow over time. However, it is important to consider the risk factors associated with them carefully, and consider your appetite for the same, before investing.