Contra funds are equity mutual funds that invest in stocks that are out of favour with the market. They are also known as contrarian funds, as they take positions that go against the prevailing market trends. The idea is to invest in undervalued stocks with the anticipation of future growth.
Contra funds have performed well in recent years. The average of only three contra funds in India comes up to 29.55 per cent in the last three years, with SBI contra fund leading with returns of 38.56 per cent. This three-year performance is notable, as the ideal investment period for contra funds is said to be three-to-five years, so that undervalued stocks in their portfolios can recover.
According to categorisation by the Securities and Exchange Board of India (Sebi), contra funds follow a contrarian investment strategy with at least 65 per cent investment in stocks.
In this strategy, a low price point is used to pick underperforming stocks and sectors in the expectation that they will outperform over time. However, these stocks yield negative returns during bear markets.
SBI Contra Fund: SBI Contra Fund gave the highest return in the category at 27.93 per cent over one year, surpassing the benchmark’s return of 15.71 per cent. The fund’s consistent outperformance extended over three years with a whopping 38.56 per cent return. Over five- , and 10-year periods, the returns were 23.93 per cent and 18.86 per cent, respectively.
Invesco India Contra Fund: Over the past one year, Invesco India Contra Fund has delivered returns of 18.30 per cent, surpassing the benchmark return of 15.71 per cent. The fund’s performance has continued to shine over three-, five-, and 10-year periods, with returns of 24.12 per cent, 17.50 per cent, and 21.24 per cent, respectively.
Kotak India EQ Contra Fund: This fund also exhibited robust performance, with direct returns of 23.11 per cent over the past year. The fund showed consistent outperformance over the benchmark in three-, five-, and 10-year periods at 25.98 per cent, 18.25 and 17.58 per cent, respectively.
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Contra funds invest in a variety of sectors, but they typically have a bias towards large-cap stocks, which account for almost 60 per cent allocation. A total of 38.96 per cent is invested in mid-cap companies.
The top three sectors in the portfolio of SBI Contra Fund, the top performer across tenures, are financial, energy, and technology. These three sectors account for over 40 per cent of the fund’s portfolio.