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Best Contra funds are a class of equity mutual funds that take contrary market calls corresponding to the market movements. We have covered the following in this article:
Contra funds, as the name suggests, take contrary calls with respect to the fluctuations seen in the market movement. The fund manager of a contra fund chooses to invest in stocks that are undervalued. The investment strategy of these funds may seem similar to that of value funds, but they are not the same.
Blue-chip stocks hardly find a spot in the portfolio of a contra fund as they are rarely undervalued. The fund manager chooses only those companies whose fundamentals are strong but the share price is undervalued. The fund managers of contra funds would be waiting to hear negative news that will cause a temporary fall in the share price of a sound company. When the price falls, the fund managers purchase equities and hold for a long duration to realise significant gains.
The table below shows the top-performing contra funds based on the past 3-year and 5-year returns:
If you are a short-term investor with an investment horizon of shorter than five years, then you may not consider investing in these funds. This is because these funds employ the value investing strategy, which does not yield good returns over a short duration. Also, the companies take some time to come out of the impact caused by the negative news around their business.
Most investors investing in contra funds are aggressive ones or those willing to bear higher levels of risk. Your investment horizon should be at least five years in order to mitigate market volatility and risks to a greater extent.
Since contra funds are a class of equity mutual funds, they are essentially taxed like any other equity fund. The dividends offered by any mutual fund are now taxable in the hands of investors at their respective slab rates. The classical way of taxing dividends was proposed in Budget 2020.
Short-term capital gains earned on selling fund units within a holding period of one year are taxed at a rate of 15% irrespective of investors’ income tax slab rate. Long-term capital gains (realised on selling fund units after one year of holding) of up to Rs 1 lakh a year are made tax-free. Any gains exceeding this are taxed at 15%, and there is no benefit of indexation provided.
Contra fund investments come with the following risks:
The following are the most important advantages of investing in contra funds:
You must consider the following before investing in contra funds: