Contra Mutual Funds

Unlike typical growth or value funds that chase strong fundamentals or undervalued assets, contrarian funds deliberately take positions in beaten-down sectors or stocks, believing they are temporarily mispriced due to market overreaction, pessimism, or cyclical factors.

Fund managers in contra schemes often:

• Buy oversold stocks during market panic or correction
• Invest in sectors that are neglected or facing temporary challenges
• Maintain a long-term view, betting on structural recovery

In 2025, contra funds have gained renewed interest as markets remain volatile, valuations in some growth sectors look stretched, and many traditional industries (like FMCG, IT services, telecom, and PSU banks) have seen significant correction.

The Nifty Contra Index (a hypothetical benchmark) has outperformed the broader market this year, reflecting a shift in investor sentiment toward contrarian themes.

Examples of strong-performing contra funds in 2025 include:

• SBI Contra Fund: Delivered ~23% CAGR over 5 years
• Kotak India EQ Contra Fund: Averaged 20–22% CAGR
• Invesco India Contra Fund: Steady returns with lower volatility

These funds benefited from early entry into sectors such as PSU banks, energy, and old-economy infrastructure stocks, which rebounded later.

• Contrarian Approach: They follow a disciplined philosophy of investing against market trends, often in cyclical or undervalued companies that others tend to avoid.
• Higher Risk, Higher Reward: Because contra investing goes against momentum, these funds may underperform in bull markets, but can shine when neglected sectors bounce back.
• Long-Term Orientation: Patience is crucial. Contra funds may lag for years before their investments begin to outperform.
• Manager-Driven Strategy: Success depends heavily on the fund manager's ability to identify mispriced opportunities and avoid value traps.

• Great for buying low and holding long-term
• Diversifies portfolio away from momentum-heavy holdings
• Can outperform in sideways or bear markets
• Low correlation with broader market indices
• Suitable for seasoned investors with a long-term view

• Underperformance during bull runs driven by growth stocks
• Extended periods of stagnation if recovery is delayed
• Sectoral concentration risks in a few contrarian bets
• Dependent on the timing and skill of the fund manager

Investors should have a minimum investment horizon of 5 to 7 years when allocating money to contra mutual funds. This allows time for market cycles to turn and for contrarian bets to play out.

These funds work best in combination with more mainstream equity categories, such as flexi-cap or large and mid-cap funds, thereby balancing risk and reward.

Being equity-oriented funds, contra mutual funds are taxed as follows:

• Short-Term Capital Gains (STCG): 15% if held for less than one year
• Long-Term Capital Gains (LTCG): 10% on gains exceeding ₹1 lakh per year after one year
• Dividends: Taxed at the investor's slab rate, with 10% TDS if annual dividends exceed ₹5,000

Contra funds are best suited for:

• Investors with a high-risk appetite
• Those who believe in value rotation and sectoral rebounds
• Investors with long-term financial goals (7–10 years away)
• People seeking diversification beyond momentum and growth stocks
• Investors who can stay calm during underperformance and avoid frequent churn

Contra funds are not ideal for short-term investors or those seeking consistent year-over-year returns.

A look at 5-year performance for leading contra funds as of mid-2025:

• SBI Contra Fund: ~23% CAGR
• Kotak India EQ Contra Fund: ~21% CAGR
• Invesco India Contra Fund: ~19–20% CAGR

These returns are particularly impressive when compared to broader indices, such as the Nifty 50 or large-cap funds, especially during periods of macroeconomic uncertainty or correction.