Contra funds go against the tide and beat market volatility

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Notwithstanding the uncertain times in stock markets, contra mutual funds (MFs) have managed to deliver better returns and helped investors beat market volatility in the long term.

A contra fund invests against the existing market trends and purchases stocks which are not performing well currently. The fund manager takes a contrarian view of the stock when it is shunned by the investors and accumulates them with a belief that the trend will reverse in the long run, creating opportunities for investors to generate superlative returns.

Interestingly, there are only three fund houses — SBI MF, Kotak MF and Invesco India MF — manage contra funds which have delivered better returns in the long term.

While SBI Contra Fund has delivered a return of 11 per cent, 25 per cent and 13 per cent over one, three and five-years, the same for Kotak MF and Invesco’s contra funds were at 2 per cent, 16 per cent and 13 per cent.

SBI MF and Kotak MF launched contra fund in 2005, while Invesco MF entered this category in 2007. Invesco MF and Kotak MF have an asset of ₹8,211 crore and ₹1,192 crore.

SBI Contra Fund has managed to double its asset in the last one year to ₹4,688 crore as on June 30 against ₹2,398 crore logged in the same period last year.

Garnering strong interest

The contra funds have witnessed strong interest from all segments of investors (retail and HNI) and suitable for investors tracking macro trends and prefer taking selective bets for higher returns.

Investors in contra funds need to be more patient than others as the fund managers are betting against the current market trend. These funds invest in stocks that are under-performing for various reasons and investors need to wait unitl the stock start performing, said Sudhir Mehta, an independent MF distributor.

While higher returns are possible if the stock lives up to the fund managers’ expectation, he said, the wait can be longer and also lead to losses.

Published on July 14, 2022

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