What is Contra Fund? Definition, Benefits & How to Invest?

You might have heard about contra mutual fund and contra investment! In this blog, we’ll talk about ‘What is Contra Fund?’ and discuss its benefits, drawbacks and whether women should invest in them or not.

How does contra mutual fund works?

Contra Funds or Contrarian Funds are where the fund manager invests in stocks they believe to be undervalued, hoping to gain from their increase in prices once the market realizes their value. These funds go against current market trends and sentiments.

What are the features of a Contra Fund?

•  As per AMFI, contra funds have to invest at least 65% in equity, which means they fall under the category of equity mutual funds.
• They go against current market sentiments. 
• They invest in stocks that are performing poorly but have the potential to rise in value.
• Its performance is based heavily on the fund manager’s capabilities.
• They are taxed like any other equity mutual fund. For long term capital gains (if held for more than 12 months), gains are taxed at 10% on profits over Rs. 1 Lakh . For short term gains (if held for less than 12 months), gains are taxed at 15%. 

What are the benefits of a Contra Fund?

• Looks for undervalued stocks – Contra funds invest in stocks or sectors that are currently undervalued by the market. This type of investing aims to buy low and sell high, taking advantage of market fluctuations.

• Potential for high returns – By investing in stocks that are unpopular, contra funds have the potential to generate high returns when these investments eventually become favored by the market again.

• Active management – Contra funds are actively managed which means that experienced fund managers actively select investments based on their research and analysis of market trends.

How to invest in a Contra Fund?

You can invest in Contra Funds on any mutual fund website of your preference by providing your KYC details and choosing an investment method. However, the risks of investing in contra funds outweigh its potential benefits. Investment in contra funds is suitable only for experienced investors with a very high-risk appetite. 

Should a woman investor invest in a Contra Fund? What are the risks associated?

The short answer is: no, not really! Let’s go through some important reasons for this!

1. Volatility – Contra Funds invest in stocks that are undervalued or whose value is lower in the market. These stocks have the potential to be more volatile than others and may have large fluctuations in their value, making them risky.

2. Underperformance – These funds invest against market sentiment, however, there is no guarantee that market sentiments will change in the future. This can lead to periods of underperformance.

3. Poor Timing – These funds attempt to time the market by buying stocks that are undervalued and accurately predicting positive future performance. However, it is very difficult to time the market, which could lead to many false predictions.

4. Inexperienced Fund Manager – Contra funds rely on the expertise of the fund manager in identifying undervalued opportunities and managing the portfolio. If the fund manager’s estimations do not prove to be true, it could negatively impact the fund’s performance.

5. High Expense Ratio – Contra funds typically have higher expense ratios due to the high level of active management and research-driven nature of fund management involved. 

Taxation Rules:

If you are invested in an contra fund and you sell these mutual fund units then the following taxation will be applicable:

• Short Term Capital Gain (STCG): If capital gain arises within 12 months i.e. 1 year then you will have to pay 15% on the capital gain.
• Long Term Capital Gain (LTCG): If capital gain arises after 12 months i.e. 1 year then tax will be applicable at the rate of 10% if your capital gain is in excess of 1 lakh.

In conclusion, contra MF are only suited for experienced investors with a high risk appetite, as it is based on estimations and predictions of future performance. Women can avoid investing in such funds due to the risky and unpredictable nature of investing against market trends. Rather, they can invest in mutual fund schemes best-suited to their goals and risk tolerance. They can even invest as per their goals! 

Check out LXME an investment platform where you can find expert-curated, diversified, time and goal-based investment for women and start investing today!

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