Contra vs Value Fund: Which is better?
Mutual fund managers offer various types of funds with the primary objective of growing money substantially. In essence, all mutual funds have the same purpose of growing investment. However, each fund offers different investing styles to suit different investors. Value and Contra funds are not the exceptions. There is a lot of confusion among new investors, related to Value and Contra funds.
Therefore, investors find themselves stuck between investing in a contra fund or a value fund. According to their fundamentals, value funds and contra funds have very different approaches. Funds that invest in value stocks look for values based on their price and valuation and their fundamentals.
In the meantime, Contra funds look for stocks and sectors that are on the cheap and are likely to perform well in the future. Mutual fund investments are primarily intended to increase wealth.
Therefore, this blog compares Contra funds and Value funds to help readers determine a better investment.
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Contra fund - What is it?
A Contra fund invests in stocks and equity that are underperforming. The fund manager buys shares that are not recognized by the market since their value increases with the market recovery.
This investment strategy does not pick underperforming stocks, but the fund manager's call can be quite rewarding if it turns out to be right. However, patience is required.
Through market analysis, he identifies underperforming companies that have strong fundamentals and a promising future.
Value fund - What is it?
Unlike a growth fund, a value fund invests in UNDERVALUED shares but possess substantial intrinsic value.
In other words, the stock is trading at a lower price than its intrinsic value. A fund manager expects the same stock to increase in value once the market realizes its true potential.
For example, if a fund manager believes that a share is worth 150 even though it is valued at Rs 100, he will invest in the undervalued share.
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Why/When should you invest in the Contra fund?
Contra funds tend to perform better over the long run than short-term investments, so they are not recommended for short-term investing.
Therefore, these funds should be considered only by investors with a high appetite for risk and looking for growth investments.
Contra mutual funds invest against existing market trends and purchase stocks that are not currently performing well but are expected to perform well in the future.
Investing in contra funds is always a good idea, no matter what the market environment is like. In reality, though, such funds are hard to come by.
Thus, investing a small portion of your money in a good contra fund is ideal, but not more than one-third or a quarter of your total financial holdings.
Due to a lack of good contra fund choices and limited options, choose one carefully.
Why/When should you invest in a Value fund?
You can get exposure to a diversified portfolio of assets by investing in value mutual funds, where most of the assets are allocated to growth mutual funds.
Value funds are considered less vulnerable because their investment strategy focuses on low-priced stocks. Moreover, value Fund shares span all economic sectors, which are often overlooked.
Therefore, underperformed stocks gain more confidence.
Contra Fund vs Value Fund: Side by side comparison
| Contra Fund | Value Fund |
| By investing in the best contra funds, you are investing in stocks or underperforming sectors but can perform well in the future. | Investments in value funds are typically made in currently undervalued stocks but have strong prospects for the future. |
| A contra fund's investment depends heavily on the stock's performance in the future, which may take years. Accordingly, they are considered highly risky. | High-risk investments include value funds as well. |
| Equity contra funds invest in stocks that are currently performing poorly, part of the equity asset class. The fund manager expects these stocks to appreciate over time and will hold onto them until the optimum moment for selling them and realizing good profits. | As well as investing in equity stocks, value funds buy shares from companies that trade at a discount to their intrinsic value. When the market realizes its true potential, the fund manager believes that the prices of these stocks will correct upward. Thus, the manager will stay invested in these stocks until the time is right to sell and generate returns. |
| Contra Funds consider economic, political, and sector factors as contributing to a stock's underperformance. | Alternatively, some of the factors that explain why stocks selected under best value funds may be trading low could be due to investor ideology, market deficiencies, or other similar circumstances. |
Who should invest in the Contra fund?
Contra Mutual Funds require more patience on the part of investors than regular mutual funds. This is because these funds invest in underperforming stocks for different reasons, which makes them underperforming. Thus, investors should wait until the reasons fade away and the stocks begin to perform once more before investing.
Investing in a Contra Fund also carries higher risks than investing in similarly situated companies with good performance. Unlike the current market favourite or momentum fund, Contra Funds do not follow market moves. However, the opposite is true - betting on underdogs.
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Who should invest in a Value fund?
Most experienced investors consider growth and value investing to be a surefire method of generating wealth. However, finding the right stocks and acquiring them at the right time requires considerable effort and knowledge of the market.
The search for good value stocks can be extremely difficult for most investors. These investors might be interested in value mutual funds. Further, value stocks tend to underperform over the long run, but their intrinsic value will eventually lead to higher performance.
Therefore, individuals interested in investing in value mutual funds should have a long investment horizon.
Risks involved in Contra Funds
The danger of falling into a so-called 'price trap' is the belief that the funds have a good value in the long run. Funds underperformed in bearish markets may maintain that status in bullish markets and may not expand even though overall stock performance is positive.
There may be a problem with the underlying assumption that assets will reach their realistic value, in this case. It is, therefore, necessary to conduct a lot of research and analysis before investing in contra funds.
Investors have already lost money when the market drops, so the market is less volatile and less risky than the overall market.
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Risks involved in Value Funds
Investing techniques employed by the fund can be risky. Political risks may also be inherent in investments besides economic and currency risks, such as debt obligations, smaller capitalization stocks, illiquid securities, and ancillary portfolio management practices, including currency hedging, short sales, and securities lending.
If you invest in value, you run the risk that the market may not realize the stock's intrinsic value for quite some time or that the stock thought to be undervalued may actually be well-positioned when purchased.
Top Performing Contra Funds
Kotak India EQ Contra Fund Direct-Growth
According to the performance review, the Kotak India EQ Contra Fund generated an annualized return of 22.59% over the last three years and 19.53% over the last five years.
Kotak India EQ Contra Fund is a Kotak Mahindra mutual fund in the equity category.
SBI Contra Direct Plan-Growth
In the past three and five years, the SBI Contra Fund has generated annualized returns of 26.29 % and 17.23 %, respectively.
Mutual Funds from SBI under the Equity category include the Contra Fund.
Top Performing Value Funds
Nippon India Value Fund Direct-Growth
In the past three years, the Nippon India Value Fund has given a net annualized return of 23.34%, and in the last five years, it has given a net annualized return of 18.36%.
Equity mutual funds of Nippon India make up the equity category of the Nippon India Value Fund.
UTI Value Opportunities Fund Direct-Growth
In the past three years, the UTI Value Opportunities Fund has generated 22.89% annualized returns and, in the last five years, 17.16% annualized returns.
The UTI Value Opportunities Fund is included in the Equity category of UTI Mutual Funds.
Wrapping Up!
Value and contra funds are different in their investment approaches; they are often confused as one fund because they appear to be the same.
India's Securities and Exchange Board has issued strict guidelines on these two investment approaches to fund houses.
Thus, A fund investor can only select either a contra fund or a value fund, not both at the same time, states the agency.