Investors should consider contra funds as markets are witnessing sharp valuation divergence across sectors. These funds aim to identify such opportunities early by investing in businesses that are temporarily out of favour but possess strong long-term earnings potential.
The category has delivered 16–18% compounded annual growth rate over the last three years, making it competitive with several diversified equity funds. Indian equities saw a sharp correction with the Nifty 500 down 15% between January and March this year before recovering. Corrections of this nature create valuation gaps between price and intrinsic value across sectors.
Investing in undervalued businesses before sentiment improves has helped contra strategies benefit from market rerating cycles, making them attractive for long-term wealth creation in the present environment.
Differentiated bets
Contra funds take differentiated bets based on valuation comfort and long-term growth potential. However, contra investing is not always about buying what is merely cheap.
Nirav R Karkera, head of research, W by Groww, wealth management arm of Groww, says certain contrarian positions, such as exposure to sectors like IT during phases of earnings slowdown and weak global demand, at times acted as a drag on returns. “This highlights that low valuations alone do not guarantee outperformance, and successful contra investing depends on identifying businesses with strong fundamentals, earnings visibility, and the potential for recovery,” he says.
Investing horizon
Contra funds suit investors with a horizon of five years or more. In early bull markets, they underperform as out-of-favour stocks take time to be re-rated. During corrections, contra funds tend to have a natural cushion since they hold stocks with already-low embedded expectations and limited downside surprise. “The high-alpha phase arrives during recoveries and late cycles, when market sentiment rotates toward value,” says Sonam Srivastava, founder, Wright Research PMS. “Contra funds are not suited for investors who benchmark performance monthly or have short liquidity needs.”
What to evaluate
Investors must evaluate the fund manager’s ability to identify fundamentally strong businesses rather than simply beaten-down stocks. Current portfolios across leading contra funds have exposure to banking, automobiles, construction, industrials, pharmaceuticals, IT and select energy names. The category maintains a healthy large-cap allocation of around 50-55%, providing stability while selectively using mid- and small-cap exposure for alpha generation.
“Contra funds should be seen as a complementary part of an equity portfolio that adds diversification through differentiated sector and stock exposure,” says Divam Sharma, co-founder, Green Portfolio PMS.