When it comes to investing in mutual funds online, there are several options to choose from. A contra fund is one such type that follows a unique approach to investing. Contra funds are primarily equity mutual funds that follow a contrarian investment approach. Read on to know what these are, and whether you should add them to your investment portfolio or not.
What is a contra fund?
Contra funds are a type of mutual funds that primarily invest in underperforming stocks. Contra funds work on the assumption that certain stocks may underperform for some time due to several reasons, but they ultimately gain momentum and offer profits due to strong business fundamentals. Contra funds invest in stocks when their prices are low. When a lot of investors invest in them, their prices begin to rise and result in high returns.
Typically, a mutual fund’s performance depends on the market. However, contra funds work differently. They are not affected by the market fluctuations as they invest in falling stocks to begin with. So, you could earn a profit on contra funds even when the market is crashing or earn a loss even when the market is booming. This also makes these funds risky.
Who should invest in a contra fund?
Contra funds can offer lucrative profits under favorable circumstances. However, they may not be ideal for all investors. The risk involved is high as these funds invest in stocks that are currently underperforming (even if it is in the short-term). Moreover, contra funds show profits over the long term as it can take some time for the market to notice these stocks. Therefore, you should invest in contra mutual funds only if you have a high-risk tolerance and are looking for long-term investment options of at least 5 to 7 years. These funds are not ideal for people investing for a short-term goal.
Contra funds can also cause financial anxiety as they are extremely risky and take a long time to show returns. Hence, they may be unsuitable for people who tend to watch the market frequently. Investing in mutual funds online requires a lot of patience, but contra funds can test your tolerance levels even more.
Another thing to note is that contra funds may not offer profits even after a long investment horizon. Therefore, if you decide to explore these funds, it may be suggested to limit their presence on your portfolio. They can be used for portfolio diversification but may not be ideal for meeting your primary financial goals. You can start with a small SIP in contra funds online with Tata Capital Moneyfy app and gradually increase your investment based on the returns you get.
To sum it up
Contra funds are high-risk investment instruments, but they can also offer high returns over the long term. In order to benefit from them, make sure to pick an experienced fund manager who is in line with your goals and is able to deliver. It may also be advised to consult a professional financial advisor before you take the plunge.
Chetan Sharma is a blogger and digital marketer by profession. He handles a network of multiple websites like samacheer kalvi books & various others. He helps clients all over the world to achieve digital success.