Interest rates surge is triggering a dip in equity multiples, and input cost inflation is taking a toll on earnings growth. In such a scenario, stocks trading at low to moderate valuations o extend a higher margin of safety for investors. This makes contra funds, a short form for contrarian, an ideal choice for investors keen to add new equity funds to the portfolio and those already having growth-heavy portfolios.
Contra funds involve investing in shares of companies that are not popular and are not in favour of the investor at this point in time. Simply put, it is defined by its against-the-wind kind of investing style.
A contra fund invests against the existing market trends and purchases stocks that are not performing quite well at the moment. The fund manager adopts a contrarian view of the stock when it is shunned by the investors and accumulates them with the idea that the trend will reverse in the long run. The core idea is to create opportunities for investors to garner superlative returns.
Contra fund invests in equities of companies in certain industries and holds them until the demand surges.
Such funds are known to gain rapidly from undervalued stocks at the time of market corrections. Market regulator Securities and Exchanges Board of India (Sebi) mandates them to invest about 65% of their total assets in equities and equity-linked products.
Investors who aim to reduce the risks during periods of market overvaluation should stay invested until the stocks reach their desired valuation. This is why contra funds are suitable for investors with a high-risk appetite. Ideally, those who are tracking macro trends and prefer taking selective bets in expectation of higher returns.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.
