What is Contra Fund
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.
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.
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