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Table of Contents
Table of Contents
Mutual fund managers adopt different investing styles to achieve the scheme’s objective. A large number of investors are interested in the contrarian investment style. This type of investment offers investors an excellent chance to make exceptional profits, although the risks are high.
We will look at Contra mutual funds, which are based on the contrarian investing style, and discuss some of the important factors you need to know about them.
Contra Fund Meaning
The Contra Mutual Fund invests in stocks that are not performing well while considering current market trends. The fund manager will take a contrarian view of the stock when investors shun it and when there is exceptional demand for it. The asset’s value that the fund manager tries to exploit is distorted by overperformance and underperformance. The primary belief is that once the current trigger levels are reduced, excessive asset prices will gradually stabilise over a long period.
The Contra Mutual Fund manager purchases stocks with lower long-term value. Due to the strong market conditions, there may be times in some sectors when downturns occur. The contra fund invests in the stocks of those companies and holds them until demand increases. As such, it is important to point out that these funds tend to perform better over the long term and are not ideal for investments with a short time horizon.
Who Should Invest In The Contra Fund?
While an investor’s patience is important, they must be patient to participate in Contra Mutual Funds. It’s just that, for various reasons, these funds invest in stocks with a poor track record. Therefore, investors must be patient to make a profit until the reasons are gone, and the stocks start performing again.
In addition, the risk associated with investing in a Contra Fund is higher over time than that of similar-sized firms performing well. The Contra Fund has no interest in market momentum and does not make bets on an existing favourite; it bets on the opposite, the underdog. If you have a reasonable risk tolerance, an investment horizon of five to seven years, and lots of patience, then it might be worth looking at the Contra Mutual Fund.
Factors To Consider Before Investing In Contra Fund
Before investing, investors are advised to consider the fund’s past performance. Furthermore, before investing in Contra Funds in India, it is important to consider the following factors:
1. Find out about the fund manager:
As his assessment of those stocks determines the choice of stocks, the fund manager of a Contra Fund will play an important part in making this scheme work. To this end, you need to have enough information on the performance of your fund manager before investing.
2. The state of the market is irrelevant:
In contrast to growth stock investment, where the performance of the market determines projected returns, the contrarian style of investing emphasizes the performance of the chosen stocks and the mitigation of dampening influences. As a result, you can make money even when the market is struggling and book losses even when the market is at an all-time high. It’s crucial to keep yourself informed about the performance of your stocks.
3. Losses are possible:
It is important to note that investing in Contra Funds involves betting on underperforming shares with the hope of improving their long-term performance. If the stocks meet your expectations, higher returns may be possible, but you must be prepared for losses if they do not. As a result, you must invest at least 10% of the portfolio in Contra Funds.
Benefits Of Investing In Contra Funds
The choice of such stocks can be limited for a contra fund manager. But investors can derive some distinct advantages from investing in these contra funds.
1. In periods of market turmoil or prolonged downturns, stock prices tend to be driven down most sharply by hyper beta stocks. In such cases, contra funds tend to have a much higher value than other funds.
2. Most contrarian stocks have a lot of upside potential, but the stock’s price doesn’t reflect it because of its obvious problems. When these problems are overcome, there’s usually a sharp increase in stock as it catches up.
3. Contra funds, in this case, have tended to pursue a divergent approach and can provide above-average investor returns as long as these ideas are well-calibrated. The risks are always there, of course, but the return could be worth it.
4. Contra funds generally focus on companies most analysts and investors normally overlook. As a result, the research focus is limited, and the impact of institutional trading on this counter is likely to be limited.
5. Generally, a contra fund purchases stocks when they’re underperforming, and in some cases, their prices tend to be low. As a result, investors in contra funds indirectly benefit from good deals on contra stocks.
Conclusion
Contramutual funds are investment strategies focusing on stocks of companies that perform poorly in the short term. This contrarian investment strategy aims to buy stocks at current market prices in the long term when the company’s immediate problems are overcome and the stock rises. In particular, it is important to note that contra-mutual funds are designed in such a way as to provide long-term returns. Therefore, it is appropriate for investors to consider their investment horizon before investing, as contra funds will not be of any benefit over the medium term.
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