In a market where the narrative keeps changing fast, and investor sentiment oscillates between optimism and fear, choosing the right mutual fund strategy becomes increasingly important. Investors over the past couple of years have witnessed sharp rallies, sudden corrections, and sector-specific booms followed by deep pullbacks. It is against this background that contra funds have once again entered the investor radar as one of the potent options for long-term wealth creation. But is a contra fund indeed a safe bet over the next five years?
In this blog, we are going to explore how contra funds work, the risks associated with them, and whether the market cycle justifies the philosophy of contra funds.
What is a contra fund?
A Contra Fund is an equity mutual fund that takes a contrarian view on the market. This fund does not chase popular or high-performing stocks; however, it looks to invest in sectors and companies that are temporarily undervalued due to negative sentiment, cyclical decline, or short-term challenges.
The core belief behind this strategy is that markets overreact for short-term intervals. Fundamentally strong businesses bounce back with time and reward the investor for their patience. The contra funds aim to benefit from this mean reversion.
Why do contra funds appeal to long-term investors?
Contra funds are attractive for investors with a long-term horizon because their investment philosophy takes time to play out. Buying stocks which are currently undervalued without knowing when they will recover, as it can take a few months to years, requires patience and discipline. Over five years, this strategy can work well if:
- The broader economy goes through multiple cycles.
- Valuations in popular segments normalise.
- Neglected sectors witness recovery.
Contra funds offer the potential for strong risk-adjusted returns to investors who have the temperament and discipline to stay invested through periods of underperformance.
Overview of the current market
Markets in the past couple of years have witnessed sharp rallies in various segments, which often raise valuation concerns in the market. At the same time, some sectors have lagged behind others due to global uncertainty, policy changes, or cyclical slowdowns.
In this volatile financial environment, contra funds seek to invest in opportunities that are undervalued for various reasons but have strong fundamentals. If economic growth stabilises and earnings visibility improves, these undervalued stocks can outperform in the long term.
However, contra strategies are likely to fail if market leadership remains narrow or growth stocks keep dominating the market for extended periods.
Risks you should consider
While contra funds are considered safer compared to other investment instruments due to their investment philosophy, they are still equity funds and hence carry market risk. Key risks include:
- Extended period of underperformance: Out-of-favour stocks may stay out of favour for longer than anticipated.
- Value traps: Not every undervalued stock bounces back, as some have structural problems.
- Timing risk: Contra strategies require patience, which is not present in all investors.
Investors need to mentally prepare for those periods when contra funds trail broader market indices to avoid making emotional decisions.
Are contra funds suitable for the next 5 years?
A contra fund is a safe bet for the next 5 years, as compared to other options, depending upon the investor’s expectation and temperament. Investors who have:
- Minimum five-year investment horizon
- Moderate to high risk tolerance
- Willingness to stay invested during periods of volatility
Contra funds can thus have a meaningful role in building a diversified equity portfolio. Funds from established houses such as SBI mutual funds are designed to focus on disciplined stock picking and risk management. A product like the SBI Contra Fund is built with a long-term contrarian approach rather than on short-term market timing.
Final thoughts
A contra fund is not a guaranteed safe bet, but it can be a strategic investment option for the next five years. The success of contra funds depends on market cycles, investor patience, and the ability of the fund manager to identify true undervalued opportunities.Â
