Contra funds are a type of mutual funds with a unique investment strategy designed to generate higher returns. Unlike traditional funds that follow market trends, these take a contrarian approach through investment in undervalued or unpopular stocks. In this article, we will explain Contra funds meaning, including value funds and focused funds.
Contra Funds Meaning, Stocks, Value
Firstly, to get obvious out of the way, Contra funds meaning is covered by mutual funds since it is a type of fund. There are a lot of investing styles adopted by various fund managers to meet investment targets. Of this one way is to opt for a contrarian style which suggests going for the contrary. While usually, people go in the direction of market trends and invest in popular funds this method suggests doing the opposite.
A contra fund is a fund that is down at the moment and does not seem to be performing well. You can say it is a bad investment by looking at it and for that reason, these stocks don’t attract investors but are instead shunned by them.
A fund like this seems not just risky but screams danger, however, it is investing in such a stock that a manager relies on to make profits in the long run.
When a stock over or underperforms the value of the asset gets distorted. a normal investor might see this situation as unfavorable. However, fund managers investing in contra funds think along the lines that this situation can be capitalized on as the unreasonable price will return to normal in the long run.
And so in this long term-based investment, a fund manager buys and holds stocks that are priced cheaply and sell them when the stock reaches the estimated profitable price in the long run.
Value Funds Meaning
Just as you had contra funds you have value funds which represent investing in mutual funds with a different strategy. Value Funds meaning is to adopt the value investing strategy. Here again, the fund manager looks for stocks that are cheap or rather underpriced. Here the stock value might be less at the moment but that does not indicate the quality of the company nor does it tell the whole story.
By looking at stuff like company management, financials, and other such things you can predict if or not the company has value or rather intrinsic value.
If its intrinsic value is more than the picture its price paints in the present then such a stock or find has a good potential to provide investors with returns in the future. Investing in such a stock that has intrinsic value refers to the value investment strategy.
Again this strategy and these types of funds are for long-term investors. The price of an undervalued stock may take time to reach the expected levels and so holding them requires patience. Also, people who have market knowledge and can read out a company’s intrinsic value successfully are the ones who can find out such stocks and invest in them.
Focused Fund Meaning
The third strategy of mutual fund investment is a focused investment strategy. A focused fund meaning can be understood to be the method under which a fund manager invests in a smaller variety of stocks, usually stocks that belong to a few sectors instead of going for stocks from a mix of a variety of sectors. So if other funds have a mix of say 100 funds this fund will only have a mix of 20 to 30 funds.
Such a fund is also known as the best idea fund and that is because the fund prefers having a smaller number of high-performing assets to get maximum returns instead of having a larger mix of stocks in the fund.
So if we compare contra funds meaning with focused funds then we can see a clear difference so far in the number of stocks in a fund as well as the kind of stocks that are included under the respective funds.
A mutual fund in general combines a larger number of shares from a variety of sectors and so a focused fund is an exception as this fund takes the opposite approach.
While other funds minimize risk, maximize return, and minimize volatility this fund goes with a more refined and careful approach where research takes the center stage and so the stocks in the fund can be said to be of better quality.
Also Read: 7 Best SBI Credit Cards In India Review
Contra Fund SBI
There are not many contra funds in India to invest in and it is easy to see why. They are not very popular with the majority since it involves the risk of going for stocks that are on the wrong end of market sentiment and are shunned by most investors and also because they require a long-term commitment. However, if you are indeed interested in contra funds then considering Contra Fund SBI might be a good thing for you.
It is certified as a very high-risk fund that has a five-star rating. The net asset value of the fund stands at 225.48 rupees and the fund size is 8,340.65 crores. The fund also has no minimum SIP amount requirements.
- The one-day return of the fund is +0.46%
- One month’s return is -1.22%
- Six-month return is +1.77%
- One year return is +14.30%
- Three-year rerun is +41.42%
- Five-year return is +14 51%
- All-time return is +18.60%
Holdings
There are 73 stocks included in this fund and those are
- GAIL (India) Ltd. with 3.96% returns
- ICICI Bank Ltd. with 3.22% returns
- HDFC Bank Ltd. with 2.77% returns
- Tech Mahindra Ltd. with 2.62% returns
- Equitas Small Finance Bank Ltd. with 2.57% returns
- Axis Bank Ltd. with 2.53% returns
- Reserve Bank of India with 2.38% returns
- Reserve Bank of India with 2.37% returns
- Housing Development Finance Corporation Ltd. with 2.32% returns
- Power Grid Corporation Of India Ltd. with 2.24% returns
- Mahindra & Mahindra Financial Services Ltd. with 2.22% returns
- Reserve Bank of India with 2.07% returns
- Oil & Natural Gas Corporation Ltd. with 2.05% returns
- Infosys Ltd. with 2.02% returns
- Indian Oil Corporation Ltd. with 1.78% returns
- Cognizant Technology Solutions Corp. with 1.68% returns
- ITC Ltd. with 1.65% returns
- State Bank of India with 1.63% returns
- Punjab National Bank with 1.56% returns
- Aster DM Healthcare Ltd. with 1.43% returns
- Tata Steel Ltd. with 1.42% returns
- Bharti Airtel Ltd. with 1.39% returns
- Hero Motocorp Ltd. with 1.30% returns
- Torrent Power Ltd. with 1.26% returns
- Reserve Bank of India with 1.20% returns
- CESC Ltd. with 1.20% returns
- ACC Ltd. with 1.18% returns
- Wendt (India) Ltd. with 1.15% returns
- Sanofi India Ltd. with 1.13% returns
- United Spirits Ltd. with 1.11% returns
- Tata Motors Ltd. with 1.11% returns
- NHPC Ltd. with 1.10% returns
- Carborundum Universal Ltd. with 1.06% returns
- Larsen & Toubro Ltd. with 1.01% returns
- Bosch Ltd. with 0.97% returns
- Sula Vineyards Ltd. with 0.90% returns
- K.P.R. Mill Ltd. with 0.89% returns
- Neogen Chemicals Ltd. with 0.89% returns
- Voltas Ltd. with 0.86% returns
- Prism Johnson Ltd. with 0.85% returns
- National Aluminium Company Ltd. with 0.84% returns
- Multi Commodity Exchange Of India Ltd. with 0.83% returns
- NMDC Ltd. with 0.83% returns
- V-Guard Industries Ltd. with 0.80% returns
- The Ramco Cements Ltd. with 0.79% returns
- Lupin Ltd. with 0.79% returns
- HDFC Asset Management Company Ltd. with 0.78% returns
- Disa India Ltd. with 0.78% returns
- Alkem Laboratories Ltd. with 0.76% returns
- Ashiana Housing Ltd. with 0.75% returns
- Bharat Petroleum Corporation Ltd. with 0.72% returns
- Gateway Distriparks Ltd. with 0.70% returns
- Esab India Ltd. with 0.67% returns
- Ashok Leyland Ltd. with 0.65% returns
- ICICI Prudential Life Insurance Company Ltd. with 0.61% returns
- Rallis India Ltd. with 0.60% returns
- Colgate-Palmolive (India) Ltd. with 0.60% returns
- Reserve Bank of India with 0.60% returns
- Ingersoll-Rand (India) Ltd. with 0.59% returns
- Kalpataru Power Transmission Ltd. with 0.55% returns
- Automotive Axles Ltd. with 0.54% returns
- The Phoenix Mills Ltd. with 0.53% returns
- Motherson Sumi Wiring India Ltd. with 0.42% returns
- Greenply Industries Ltd. with 0.32% returns
- Aurobindo Pharma Ltd. with 0.29% returns
- Kajaria Ceramics Ltd. with 0.28% returns
- Prataap Snacks Ltd. with 0.28% returns
- NMDC Steel Ltd. with 0.25% returns
- Andhra Paper Ltd. with 0.25% returns
- Prestige Estates Projects Ltd. with 0.22% returns
- Delhivery Ltd. with 0.21% returns
- Coromandel International Ltd. with 0.18% returns
- Biocon Ltd. with 0.12% returns
Peer Comparison
As understood from contra funds meaning and seen above there are not many contra fund options to invest in. Apart from the SBI contra fund, the other two options are Kotak India EQ Contra Fund Regular Growth and Invesco India Contra Fund Growth. When compared to each other here are the results.
| Fund/Parameters | 1-year return | 3-year return | Ratings | Expense Ratio | Fund Size |
|---|---|---|---|---|---|
| SBI Contra Fund Growth | 14.30% | 41.42% | 5 | 1.91 | 8,341 crores |
| Kotak India EQ Contra Fund Regular Growth | 5.12% | 26.20% | 4 | 2.26 | 1,441 crores |
| Invesco India Contra Fund Growth | 0.96% | 24.49% | 4 | 1.77 | 9,348 crores |
From the above table, it is not difficult to derive the contra fund of SBI being the better of the three.
Miscellaneous
The expense ratio of the fund includes the GST as well. The exit load that you may incur if exiting the fund in 1 year is 1%. Starting from 1st July 2020 the stamp duty on this fund is charged at 0.005%.
If you redeem the returns before a year then they are taxed at 15% and if you redeem them after one year then you pay 10% on returns of more than 1 lakh rupees in a financial year.
Contra Funds in India
So we have seen Contra Funds meaning and also seen that only 3 of them are available in India. Those three contra funds belong to SBI, Kotak, and Invesco respectively. Of the three SBI happens to have the best contra fund among three based on its returns in the past 1 as well as 3 years. The features of Contra funds in India are,
- As per SEBI, a contra fund needs to invest at least 65% of assets in equity-linked and equity instruments.
- A contra fund carries a high risk and by the inverse nature of higher the risk higher the reward they also carry a higher return rate.
- Contra funds are taxed as let short-term capital gain percentage or long-term capital gain percentage based on the amount of time they are held and the amount earned from them.
- A dividend of up to 5,000 rupees from contra funds is not charged and after that, a 10% tax is incurred.
Contra Funds vs Value Fund
So now that we have seen the three investment strategies of mutual funds and also looked at the three contra funds of the Indian market it is now time to compare contra funds vs value funds since the two look almost similar while focused funds pose as a different kind of fund from these two.
To revise, contra funds meaning are those funds where a contrarian approach is taken. Here the fund manager will go for those stocks that don’t enjoy strong market sentiment at the moment.
On the other hand, a value fund is a fund that has stocks that are undervalued but have an intrinsic value that tells you that these stocks will eventually deliver profits even if that doesn’t look to be the case at the moment. Other differences between the two are:
1. Investment Objective
When we talk about contra funds it is about investing in stocks or sectors that are not doing well at the moment and have been overlooked by everyone but you hope that they will gain value in the future and deliver returns.
On the other hand, value funds include stocks or sectors that are undervalued at the moment but have unrealized value or intrinsic value on the back of which they will see a gain in price in the future.
2. Underlying Factors
While the stocks or sectors that are considered for value and contra funds both might be down at the moment the reason for this is different in both cases.
Stocks that are down due to economic, political, or sectoral issues make up for stocks considered for contra funds whereas stocks considered for value funds are those that are down because of investor ideology, market deficiencies, or other such reasons.
3. Risk and Return
There is a similarity in the kind of risk and return that both these funds share. Also, both these funds are suited to people who are looking to make long-term investments. However, stocks considered for value funds have a logical reason as well as an intrinsic value which makes for a compelling argument to invest in them.
On the other hand, contra funds include shares that are down due to reasons that might not be related to the market and so investing in them might be slightly riskier as it is based on sentiment rather than something that can be explained by math or economics.
4. Asset Class
Both funds look to invest in equities, however, contra funds need to make at least 65% investment in it. Stocks considered for contra funds might be giving negative returns at the moment.
In both cases, the fund manager is expecting the stocks involved to make a profit in the future until then, they are more than happy to hold the stock. However, one makes the assumption based on intrinsic value and the other based on sentiment or rather a plain assumption.
The two funds also share some similarities like being taxed at the same rate be it on short-term gains or long-term gains. Also, investors investing in either fund need to be prepared to hold the fund for five years or maybe even more before they can see positive returns.
So, with that we have not only understood contra funds meaning, value funds and focused fund meaning but also have gained an insight into the world of mutual funds and how strategies in this market work. By strategically opposing prevailing market sentiment, contra funds offer diversification and the potential for long-term capital gain.
