Contra funds are equity mutual funds that follow a contrarian investment strategy. Instead of buying popular stocks that are already doing well, the fund manager looks for good companies or sectors that are currently out of favour.

This philosophy is called contrarian investing. It means going against the crowd. Generally, when market sentiment becomes negative about a company or a sector, its price may fall. But if the fund manager believes the business is still strong and the problem is temporary, they may invest in it while the price is low.

So, when you invest in a contra fund, you are essentially taking a long-term bet on the turnaround of a beaten-down stock or a sector. Therefore, these funds are classified as high-risk, high-reward investments.

Contra funds can be a suitable investment choice if:

• You can invest for 5+ years: Turnarounds can take time. You should be comfortable waiting for the fund manager’s investment strategy to play out.
• You’re comfortable with higher risk: Since contra funds invest in stocks that are facing problems or have negative sentiment. They tend to carry higher risk than trendy stocks.
• You already have a diversified core portfolio: You can consider a contra fund as an additional investment rather than making it the main part of your portfolio.
• You can handle the fund’s long underperformance: Contra funds may lag the broader market when popular growth stocks are leading a rally.

When you invest in a contra fund, your money is pooled with other investors' money. The fund manager then uses this pool of money to invest in beaten-down companies with potential to turn around.

Before picking stocks, the fund manager understands the reason behind the fall and may consider factors such as:

• Earnings
• Debt
• Cash flow
• Business prospects, etc

Now let’s say you invested ₹5,000 in a contra fund when the NAV is ₹50. You would receive 100 units. Here’s what your investment could look like over the years:

As long as the portfolio companies face pressure, the fund’s NAV may struggle to rise or may even drop. But when businesses improve and sentiments change, the NAV may start to rise. This is why contra funds might need a longer horizon to perform. However, this is just an example. The actual performance may differ.

Here are some of the benefits these funds can offer you:

• Opportunity to buy unpopular stocks: These schemes invest in stocks and industries that other investors may be avoiding. If they recover, buying at a lower price can create a better risk-reward for the long term.
• Potential for strong long-term returns: Returns can come in two folds. The first is when the underlying companies' earnings start to improve, and the second is from increased momentum when everyone else starts buying. Sometimes, this can take years.
• Exposure across sectors and market caps: Unlike sectoral funds, mid-cap funds, or small-cap funds that invest in specific sectors or market caps, contra funds aren't tied to any one sector or market cap. This can give you a different kind of diversification.
• Different approach from mainstream funds: Contra funds can behave differently from funds that mainly invest in popular growth stocks. This gives you an opportunity to add a different investment style to your portfolio.

You must consider the following risks before investing in the contra schemes:

• Returns are not guaranteed: Turnarounds are uncertain. The market may or may not change its view quickly. A fund can remain invested in an unpopular sector for several years before the expected recovery happens.
• May underperform severely in bull markets: When a few popular stocks or sectors lead the market rally, contra funds may not keep up. This can be frustrating if you compare their returns with the broader market returns.
• Economic conditions can delay recovery: Many contrarian investing opportunities arise in cyclical businesses such as metals, infra, auto, etc. Their recovery can be affected by interest rates, demand and other economic conditions.

How can you handle these risks?

Here are steps you can take to manage some of these risks:

• Have a 5-7 year horizon: Give the companies in your contra fund enough time to recover and turn around.
• Consider SIP over lump sum: Investing regularly helps you average the cost across different price levels.
• Keep your contra allocation limited: These schemes can be a part of your portfolio rather than the entire portfolio. The right allocation depends on your risk level.
• Keep short-term money separate: Don’t invest emergency money in equity schemes. Instead, explore debt schemes such as overnight funds, liquid funds, or short-duration funds.

These funds may look similar, as both invest in stocks that the market is currently ignoring. But they differ in how they approach these opportunities. Let’s compare the two:

Since both these schemes are high-risk options, you can explore other mutual funds for a more balanced risk. Schemes like dividend yield funds, multi-cap funds, and flexi-cap funds offer a good blend of growth plus stability. For even lower volatility, you can consider debt schemes like corporate bond funds or gilt funds.

To pick the best contra mutual funds, you must consider some important factors, such as:

• Performance during tough market phases: Check how the fund has behaved during the past market corrections. A good fund should show strength even during tough phases.
• Portfolio holdings: Look at the fund’s holdings and sector allocation. Avoid choosing the funds simply because they hold one stock or sector you like.
• Fund manager’s track record: The manager’s experience matters. Check how long they have been managing contra funds and whether they’ve followed the scheme’s strategy consistently.
• Growth vs IDCW plan: Growth plans keep returns invested in the fund, while IDCW funds pay out returns. For long-term compounding, growth funds are better.
• Expense ratio: Choose a fund with a lower expense ratio to reduce your annual cost. This can help improve your return over the long term.

While you’re comparing the best contra funds, always keep your financial goals and risk tolerance in mind.

Once you pick the contra funds to invest in, setting up an SIP on Millions takes only a couple of minutes:

• Install the Millions App on your smartphone.
• Enter your mobile number and complete the KYC process to open your account.
• Go to the mutual funds section and browse through various contra funds to invest in.
• Select the fund that meets your requirements, then tap SIP.
• Choose the frequency you’re comfortable with, such as daily, weekly or monthly, and enter the SIP amount.
• Pick your preferred SIP debit date and confirm the first payment.

That’s all. Your SIP is set! You can start with a small amount initially and increase your SIP as your savings grow. The step-up option lets you automatically increase the investment amount every year.

Remember, contra funds are still equity funds. So, before investing, make sure they fit your overall portfolio and risk level. You can consider debt schemes like banking & PSU funds, corporate bond funds, or gilt funds for more balanced exposure.