Contra Fund vs Value Fund: Meaning, Differences & Risks

Mutual funds are popular investment options which provide significant returns at varying degrees of risk. Every mutual fund has different features and investment objectives. For example, contra funds and value funds are two categories of mutual funds which work on the principle of investing in underperforming or undervalued stocks or sectors. 

Both follow a unique investment strategy which may not be the cup of tea for the general investor. 

Let’s understand the different aspects of these funds and see which one is better for you! 

What Is a Contra Fund?

A contra fund is a mutual fund which adopts a contrarian or against-the-flow investment style. They invest in distressed securities or assets which are underperforming at that particular time period. In contra funds, managers tend to focus more on the fundamental value of the underlying entity rather than its current trading or market value. 

Fund managers believe it will be beneficial to buy the stressed securities as it will provide superlative returns in the future when the situation improves.

Why Should You Invest in Contra Funds?

Here are some reasons why you can consider investing in contra funds: 

• These funds provide a great opportunity for earning huge returns as you invest when stocks are distressed, i.e., when the price is low, and sell when market situation improves. 
• As the investment timeline of these funds is long-term, you can invest in them if you have certain long-term financial goals in mind. 
• It is, again, an ideal investment for risk-tolerant investors who will not hesitate to undertake risks in search of high returns. 

What Are the Risks of Investing in Contra Funds?

Here are some of the risks that you may face while investing in a contra fund: 

• One of the biggest drawbacks of investing in a contra fund is that it functions on the notion that the value of an asset or security will increase in coming years. However, if the fund manager’s analysis goes wrong, investors will have to incur heavy losses. 
• Contra funds flow against the tide, and investing in them requires thorough analysis and market research. It may not be an ideal investment idea for new or budding investors. 
• Investors of contra funds may suffer from price trap belief that the fund’s value will improve in the long run. A fund is underperforming in bearish market conditions, but there is no guarantee that it will outperform or improve when market sentiments become positive.  

Top Performing Contra Funds in 2022

Here are some top performing contra funds that you can invest in 2022: 

Note: The values are valid as of November 7, 2022. 

What Is a Value Fund?

A value fund is also a type of mutual fund which operates on the principle of value investing. This entails investing in stocks of undervalued companies, with the expectation that they may rise in future to provide significant gains. 

One of the main objectives of these funds is to wait for the market to realise the value of the stocks. Fund managers hope that once the stock prices increase, they will offer significant returns to the investors. Some of the biggest proponents of this style of investment are veterans Warren Buffet and Benjamin Graham. 

Why Should I Invest in Value Funds?

Here are the reasons why you can consider investing in a value fund:

• It offers diversification to investors as they can enjoy the benefits of investing in different asset classes. 
• It is a less vulnerable investment strategy. This is because you tend to invest in low-priced or undervalued stocks spread across different economic markets. 

 What Are the Risks of Investing in Value Funds?

Here are some of the risks that you may face while investing in a value fund: 

• It can become challenging for investors to determine the intrinsic value of a security. These mutual funds function on the premise of the actual underlying value of the stock and ignore its face value. Any error in methodology or market research will provide lesser returns than expected. 
• Value investing is a complex investment strategy that requires patience and in-depth knowledge about the underlying stock or sector. Therefore, this investment fund is best suited for seasoned investors. 
• Political risks and economic or currency risks may affect the portfolio of a value fund. Debt obligations, currency hedging, securities lending, etc., may hinder the true value realisation of these funds.   

Best Value Funds of 2022

Here are some of the best performing value funds in 2022: 

Note: The values are valid as of November 7, 2022. 

Contra Funds vs Value Funds

Here are some differences between contra mutual funds and value funds:

However, there are also certain similarities between contra and value funds. 

• Both have a long term investment horizon. Hence, investors should ideally remain invested in them for about 5-7 years on average to generate any meaningful gains. 
• Moreover, the taxation scenario of both mutual fund categories is similar. 

However, as per the norms of the Securities and Exchange Board of India (SEBI), a fund house cannot offer both contra and value funds. They can offer either a contra fund scheme or a value fund scheme to their investors. 

Final Word  

Contra and value funds are different investment options that focus on underperforming and undervalued stocks with the belief that their value will significantly rise in future, giving huge returns. 

Investors who wish to invest in underperforming stocks or sectors in hopes of gaining exponential returns during bullish trends can consider investing in such funds. However, it is ideal to do thorough research about the fundamentals of the underperforming stocks before making any investment decision. 

Frequently Asked Questions