These funds, as the name indicates, take a contrarian perspective of equity. At inexpensive valuations, the fund manager selects underperforming stocks or industries that are likely to perform well in the long run. Experts, for example, kept a two-year contrarian perspective of telecom stocks.
Contra funds are mutual equity funds that take a counter-market perspective. Underperforming stocks and industries are selected at low price points in order to achieve long-term performance.
Most of these funds are part of the category of equity-diversified. The differentiation is in the investment style. A reinforcing rupee, for example, strains IT companies ‘ margins as their leading company comes from the US. However, a contra fund manager would grab IT stocks and wait for the weakening of the rupee.
Some renowned contra mutual fund are ING Contra, Kotak Contra, L&T Contra, Magnum Contra, Religare Contra, Tata Contra and UTI Contra. Over two years, they have returned between 8.5 and 14 percent. Tata Contra and Religare Contra gave outstanding yields of more than 20 percent each. With in the same period, according to the private fund rating agency, Value Research, the delicate index of the Bombay Stock Exchange, or the Sensex, and large-cap equity-diversified funds transferred 12% and 13% respectively.
Contra funds have returned about 8.5-13 percent in the last five years.
Who should be investing in these funds?
Financial planners recommend that people should consider this category as an opportunity for diversification, that is, only after investing a substantial part of their portfolio of mutual funds in periodic large-cap, diverse equity funds. Even then, invest in these funds only 10-15% of your portfolio.
Note, these funds are investing in topics that are’ out-of-flavor’ and may not perform in the brief term. Moreover, this option should only be considered by those with an investment horizon of up to five years.
These funds are riskier than periodic large-cap funds. The call from the fund manager can go awry. Before investing, analyze your risk appetite.
How can a contra fund be selected?
In contrast to equity-diversified funds, you cannot base your investment choices on contra funds ‘ yields. You need to look at the fund’s mandate and the topics in which it invests. If you believe with the perspective of the fund manager, given the anticipated yields, you should invest. The other thumb-rule is investing in long-standing funds, not in new fund offers.
How is the taxation of these funds?
The returns are taxed at a flat rate of 15 percent if you sell the units in less than a year. The benefits will be long-term and therefore, tax-free if you hold them for more than a year.
A 0.25% transaction tax on securities is levied on everyone while investing as well as on redemption.