Mutual Fund Unlocked: Contra Funds

Being a mutual fund investor one always looks at various options to diversify portfolio. Contra fund is one such fund which investors can look for to diversify with a comparable exposure.

As the name suggests, the fund takes a contrarian view on the equities and invests into securities having cheap valuations, but rich balance sheet. These funds follow a view which is different from the market trends.. The fund managers of these funds bet against the market trends, that is, it determines and invests in underperforming stocks which are expected to do well in the coming period.

However, it is advised that investors should take a calculated exposure into these funds with the purpose of diversification post aligning investment to financial goals with the help of other mainstream categories like equity large-cap, equity mid-cap and equity small-cap. Also investors should be aware that these funds invest in the out of the box themes which are against the market trends so your investment horizon should be longer, around 3 to 5 years. On the risk front, these funds are quiet riskier than that of the other fund categories due to its investment strategy. So it is advised to check the risk appetite before investing into these funds.

Unlike the equity large-cap, mid-cap, multi-cap and small-cap funds cannot be evaluated on the basis of track record of the performance. Healthy historical performance will be an added advantage, but the fact is that these funds should be evaluated on the basis of the portfolio they hold, fund management style and on the basis of investment philosophy of the fund because the themes in which the fund manager is investing will be an important aspect to look into to determine the future outlook for the returns.

As these funds invest major portion of their assets in equities (more than 65 per cent) they are treated just like the equity funds, where the investors have to pay STCG ( Short term capital gain) tax of 15 per cent, if he sells the investment within one year and LTCG (long term capital gain) tax of 10 per cent post one year, if the gain exceeds Rs. 1 lakh.