We decode the world of contra mutual funds—a unique style of investing that stands out from the crowd.

The Story

Remember one of India’s greatest sporting moments—the 1983 Cricket World Cup?

Back then, Team India wasn’t a favorite. Ranked eighth globally, they were the underdogs facing cricketing giants like West Indies and England. No one gave them a chance. But Kapil Dev and his spirited squad pulled off the unthinkable.

Against all odds, they defeated the two-time champions West Indies in the final and lifted the trophy. It was a moment of sheer disbelief and joy, proving that sometimes, betting on the unexpected pays off big.

Now, why are we talking about cricket in a conversation about investments? Simple—to highlight this: when underdogs win, they win big.

Applying similar principles in investing, we have a contrary style of investing.

Contrary style of investing

The meaning of contrarian itself is a person who opposes or rejects popular opinion. So when an investor does not follow the crowd and invests in something that seems against the popular notion, that’s what we would call a contrarian style of investing.

Contra mutual funds are like investors who go against the crowd.

Imagine a scenario where the market is falling, and most investors are panicking and selling their stocks, fearing further decline. A contra investor sees this chaos as an opportunity. Instead of joining the sell-off, they buy fundamentally strong stocks at lower prices, believing the panic is exaggerated and the market will eventually rebound.

While this approach carries higher risk, it can offer significant rewards for those who are patient and willing to wait for the market to recover.

Three major advantages of contra mutual funds

1. Buying at a Discount
Contra mutual funds aim to pick quality stocks when their prices are low. This strategy gives you the chance to invest in strong companies at a ‘discounted’ price.

2. Turning Market Panic into Opportunity
Contra funds thrive in situations where most people are selling out of fear. They turn market pessimism into an opportunity for long-term growth.

3. Portfolio Diversification
Contra mutual funds often invest in sectors or companies that are not performing well currently, adding a layer of diversification to your investments.

The result?
When these companies bounce back, the potential for higher returns increases significantly.

Remember the COVID-19 market crash in March 2020, panic selling was everywhere. Investors dumped stocks across sectors, fearing prolonged economic damage.

Contrarian investors, however, saw this as a chance to buy quality companies at deeply discounted prices. As economies reopened and confidence returned, the markets bounced back sharply, rewarding those who invested during the crash.

In India we have three only contra mutual funds but with a significant track record. Here’s a snapshot.

How Contra Funds Spot Hidden Gems: 

Contra funds thrive by going against the crowd. When tech stocks took a hit earlier this year amid layoffs and funding slowdowns, these funds saw an opportunity in the panic. 

Similarly, while energy stocks boomed post-Ukraine crisis, contra funds turned to undervalued sectors like manufacturing and pharma.

By betting on today’s underdogs, they position for tomorrow’s big wins.

To conclude

Investing in contra mutual funds is like placing your faith in underdogs. It’s a strategy for the patient, those who can see beyond the current market noise to spot long-term potential.

As with any investment, understanding your risk tolerance and aligning it with your financial goals is key.