​Contra fund or value fund: Which is better for investors?

A mutual fund is a prudent financial investment product, which offers considerable returns at differing degrees of risk and is of different types. For instance, value funds and contra funds are two mutual fund categories, which work on aspects linked with investing in undervalued sectors or stocks. Both mutual fund types come with unique investment strategies. Here’s a comparative analysis between contra fund and value fund, which can help you make an informed decision. Read on to understand.

What is a contra mutual fund?

A ​c​ontra fund is an equity mutual fund, which majorly invests in equities and has a contrarian viewpoint on market. Managers of this fund bet against the existing market sentiments and trends. They choose undervalued but sound stocks, at lower costs to make the most out of steep rises. According to SEBI, contra mutual funds investment must require to invest a minimum of 65 per cent of overall assets in equity instruments.

Reasons to invest in a contra mutual fund –

  • Figures out and invests in ignored or hidden investment opportunities.
  • Can generate superlative returns because stocks having sound fundamentals are purchased at lower expense and sold when the broader market considers them.
  • Can come across as a hedge in times of overvalued market phases against market corrections.

What is a value mutual fund?

A value mutual fund is a kind of fund which follows the value investing principle. This means investing in undervalued companies’ stocks with an anticipation that they might rise in the future to offer considerable returns. One of the major goals of such funds is to patiently wait for markets to realise the stocks’ value. Managers hope that if the stock prices rise, they would offer considerable returns to you.

Reasons to invest in value funds –

  • It provides the benefit of diversification to you as an investor as their asset is allocated in the growth-linked schemes.
  • Value fund investments are disseminated across distinct sectors. These are the sectors that are overlooked. Investment in them adds market confidence to underperforming stocks.
  • As value mutual funds avoid investing in stocks with high expectations linked with them, they are less vulnerable.

What is the difference between contra and value funds?

Contra and value mutual funds are alike in the sense that both funds make their investment decisions fundamentally based on valuation. However, there is a slight difference between value and contrarian investing. While value fund concentrates on the gap prevalent between the trading price of shares and intrinsic value, contrarian investing concentrates on fundamentally sound stocks to trade at lower costs than their current past.

Ending note

Value and contra mutual funds are distinct investment choices that concentrate on undervalued and underperforming stocks with the aim that their investment value will considerably increase in the future. If you are one of those who want to invest in underperforming or undervalued sectors or stocks in hopes to gain higher returns during rising market trends, then you can consider such mutual funds. However, before you invest in such funds, it is recommended to conduct your own research to make an informed decision.