Contra funds and value funds can be viewed as the underdogs of the mutual fund category. Both contra funds and value funds follow a unique investment strategy that may or may not be ideal for every investor.
This blog will compare contra funds and value funds to know which fund could be a better investment option.
What Is A Contra Fund?
A contra fund falls under the equity funds category. It primarily invests in underperforming stocks with the assumption that these stocks will be profitable and lucrative in the future.
The stocks may be underperforming due to short term concerns or fluctuations in the market or investor ideology. But in general, these stocks may have strong leadership and business fundamentals.
This contrarian style of investing is the reason for the name, “Contra fund”. However, the investment strategy does not involve picking random underperforming stocks.
The fund manager analyzes the market to identify fundamentally strong companies with a solid future potential even though they are currently underperforming.
A value fund falls under the equity fund category as well. It follows a different approach to investing in equity. A value fund will invest in stocks that are currently undervalued.
The underlying assumption is that these stocks have high intrinsic value and future potential that the market and indeed the investors have not realized yet.
A value fund looks to leverage this with the belief that the stock price will increase once the market deficiencies correct themselves. This will allow value fund investors to gain lucrative returns over the long term.
Both contra funds and value funds are high-risk investments that require patience and a long term commitment of 5+ years.
According to SEBI guidelines, a fund house can only offer a contra fund or a value fund but not both. Contra funds and Value funds are clubbed into one category by SEBI which includes 18 scheme options.
Contra funds and value funds follow an unorthodox approach to buying stocks. Contra funds invest in underperforming stocks while value funds invest in undervalued stocks.
But both contra funds and value funds are high-risk, long term investments that require thorough analysis, research and patience. Thus, it is crucial to speak to a wealth coach to know if you should invest in contra funds or value funds.
Watch this video to know why it is important to have a trusted wealth advisor
Facts & figures are true as of 20-10-2021. All information mentioned is for educational purposes and relies on publicly available information. None of the information shared here is to be construed as investment advice. We strongly recommend you consult a Cube Wealth coach before investing your money in any stock, mutual fund. PMS or alternative asset.
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