The market has been moving northwards, barring a few volatile sessions giving downward directions to the index. Most of us are clueless about the future direction of the market. The search for value stocks is still on and now there is talk of buying growth at reasonable price. But this may not be appealing to many of us.
There are still many of us with ample cash in hand, but not really comfortable with investing in this hot market. Some of us are in hot stocks. But the heat is beyond the ability to bear and many of us are assessing possibilities to move out of the hot sectors and get into something which may not be really beaten up as badly as the broad market in times of carnage.
The theme of contrarian investing makes sense at this moment of time. The basic philosophy of contrarian investing is to find fundamentally good ?out-of-favour? stocks. These could be from the universe of value stocks as well as growth stocks, and hence need not be a low PE stock. The idea is to park funds in stocks that will catch the market attention at a later date and you end up making a good killing in it.
This strategy has proved well for long-term investors. However, a word of caution: you as an investor must be well equipped to understand what is fundamentally sound and why it is ?temporarily? out of favour? A failure on this front will make you ?owners of dead stocks?. To overcome this problem, you may consider investing in contrarian schemes floated by mutual funds.
As of now there are eight such schemes to consider. The recent offering is from JM Mutual Fund. The oldest one is from SBI Magnum Mutual Fund. The scheme was floated in 1999 and has been one of the star performers. In the last one year it has delivered in excess of 50%, thanks to its exposure to some of the hot stocks and hot sectors.
On the other hand, all other funds in this category have delivered returns way below the broad index returns. This is primarily because fund managers have taken exposure to some of the real contrarian bets. The underperformers in the markets are being picked by these funds at attractive valuations, and hence in the short term the returns look abysmal.
The portfolios have significant place for out of favour sectors like oil and gas along with chemicals and pharmaceuticals. Oil marketing PSUs, pharma companies having R&D focus, that has underperformed along with some of the specialty chemicals manufacturers appear in the holdings list. Technology picks are another contrarian bets some of the contrarian funds are betting on. In the long term, as investor preferences change these investments may fetch good returns.
Investors who need a different taste of equity may consider investing in the contrarian funds. However, there is a need of conviction when it comes to investing in such funds. Also, the holding period has to be considerably longer for contrarian funds, compared to that of a diversified fund. This is primarily because it takes time for a sector to become a darling of investors from the status of a sector which is out of favour. In other words, it is for investors with long holding ability and penchant for risk, of course, with a small portion of their portfolio.