What is Contra Fund

 

 What is Contra Fund

 A contra fund is distinguished from other funds by its style of investing. A contra fund takes a contrarian view of an asset, when it either witnesses exuberant demand from investors or is shunned by them at a particular point in time due to short-term triggers.

The asset’s poor performance or outperformance leads to distortion in valuations, which is what a contra fund seeks to capitalise on. The underlying assumption is that the asset will stabilise and come to its real value in the long term once the short-term concerns plaguing it either become irrelevant or are mitigated. The idea is to buy assets at a cost lower than its fundamental value in the long term. Investors must take note of the fact that contra funds may not perform in the short term because of the kind of assets they invest in. The contra fund may pick up stocks that are out of favour or invest in sectors that are witnessing a slump. A fund that seeks to capitalise on a commodities slump by picking up stocks in companies belonging to the sector can be called a contra fund. ING Contra, L&T Contra, SBI Magnum Contra, Kotak Contra, Tata Contra, UTI Contra and Religare Contra are some of the examples of contra funds in the Indian market.

 Example :

  Let’s assume  that the news and people’s sentiments around the Banking sector is negative for time being and people are avoiding investing in these sectors.. A contrarian Fund Manager  will purchase stocks of fundamentally strong and undervalued stocks from this sector. When the turnaround of the sector happens and Banking sector stock prices recover, the value of the stocks should rise greater than the overall sector due to the company’s rising earnings along with it and the fund will give best returns to investors .

 Features and Taxation of Contra Funds:

Contra Funds are equity oriented funds and as per the mandate of the Securities and Exchange Board of India(SEBI), at least 65% of the total investments of Contra Funds must be in Equity and related instruments or stocks.

Since Contra Funds fall under the category of equity investments, they are taxed in the same manner as other equity oriented mutual fund schemes.

For investments upto a period of 12 months, you would be subject to a short term capital gains tax of 15%. This 15% tax will be deducted from the net gains from the investment.

Meanwhile for investments more than a period of 12 months, you would be liable to pay a long term capital gains tax of 10% at the time of redemption. This 10% tax would be deducted from any profits of more than Rs.1 lakh. Say suppose the total returns from the investment is Rs.3 lakhs. Then 10% will be deducted from Rs.2 lakhs( 3 lakh – 1lakh) as a long term capital gains tax.

Who should Invest..

 

Though Contra Funds can potentially generate high returns for you, they come with the caveat of high risks. Making Contra Funds high-risk-reward investments.

So it’s in the investor’s best interest to evaluate how such a fund would help them achieve their financial goals. Usually such funds give best returns over long period of time say 3 years or more.

Before investing, it is also important to evaluate the fund manager by looking at his experience and performance during market downturns. Having a slight idea about the companies the fund invests in is also beneficial.

Due to  a high amount of research involved , Contra funds are suitable for aggressive investors with time and experience.

 3 Best Contra Funds :

 1.    SBI contra fund : Started in 2005 , the fund is rated 5 star by CRISIL. The fund ha delivered 16.36% CAGR . Last 3 and 5 years CAGR is 25% and 15% respectively.  In 1 year it has delivered 85% returns. Current NAV as on 05/10/21 is Rs.197.27. Rs. 10000 invested 3 year back is worth 17820.

 2    Kotak India EQ Contra Fund : in 2005 , the fund is rated 3 star by CRISIL. The fund ha delivered 14% CAGR since inception. Last 3 and 5 years CAGR is 21% and 16% respectively. In 1 year it has delivered 59% returns. Current NAV as on 05/10/21 is Rs. 84.57 . Rs. 10000 invested 3 year back is worth 17827

 3.    Invesco India Contra fund : in 2007 , the fund is rated 3 star by CRISIL. The fund ha delivered 15% CAGR . Last 3 and 5 years CAGR is 21% and 16% respectively. Current NAV as on 05/10/21 is Rs.77.64 . In 1 year it has given 56.63% returns. Rs. 10000 invested 3 year back is worth 17820.