Contra fund is a type of fund which is different from the other funds by the style of funding.
Contra Funds are part of the equity – diversified category. Its unique style of funding makes it distinguished from the rest of the funds. It takes a contrarian view of the asset. The poor performance of the asset usually allows distortion in valuations. These funds capitalize on these distortions. Generally it is assumed that the asset will bounce back to its real value in the long term once the short term issues stopping it either become irrelevant or are completely eliminated. A fund which capitalizes on the commodities slump by taking stocks in companies which belong to the sector is called a contra fund.
As suggested by financial planners that individuals should look at this category as a diversification opportunity. It can be beneficial after they have invested a significant portion of their mutual fund portion in regular largecap, equity diversified funds. A 10-15 percent investment of the portfolio can be made. If you have an investment plan upto 5 years then it can be a very good option. As these stocks have lower investor interest and are under – owned, if the investment argument is proved right, the returns can be much higher than the market. Although investing in these stocks can be risky but if the stocks are carefully identified at the right time, the risk reward is very high.
|Power Grid Corporation Limited||4.31%|
|ICICI Bank Limited||4.92%|
The factors which must be kept in mind before investing in such stocks are in case of commodity stocks, one has to see the underlying dynamics of the commodity that the stocks represent – the global demand supply and inventory and the current cost curve must be looked upon before taking a decision to invest. You must avoid making investments in companies whose competitive advantage has been eroded and also the chances of making reasonable return on capital in the medium term is very limited. The contra strategy is a risk reward strategy so investments should be attempted only after making a thorough analysis of the company’s performance in the market.