What are contra mutual funds?

Contra mutual funds, sometimes also referred to as contra funds, are mutual fund schemes where the investor invests mainly in undervalued stocks. Fund managers pick up stocks that are currently not performing well in the short term but are expected to outperform in the market in the future. This way they can get the assets at a lower price than their historical value and get potentially long term growth.

Since contra mutual funds go against the market trends, they are characterised by relatively higher risk.

4 things you should know about before investing in contra mutual funds

Help in diversification: Most investors acquire assets that are bound to perform well with the bull runs in the market. A contra mutual fund, meaning going against the market flow, helps in diversifying your portfolio by adding an investment that performs against the market trends. It is like betting on the underdog and giving the investors a chance to get above-market returns.

Require a longer investment horizon: Contra funds are more suitable for a long-term investment horizon since they are likely to take longer than other stocks to show good results. With contra mutual funds, you need to exercise patience and hold the investment for the long term so that it can deliver potentially solid returns.

Suited for seasoned investors: A contrarian investment scheme, used for contra mutual funds, is something that many novice investors may not be aware of, or are too afraid to adopt. It may be more suitable for experienced investors who are willing to take a relatively higher degree of risk by going against the market trend.

Based on estimation: Contra mutual funds, by definition, are equity mutual funds that go against the flow of the market. This means that fund managers pick underperforming stocks based on estimations of which ones may outperform in the future. Essentially, the returns of investing in contra mutual funds depend on the expertise of the fund manager.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.