Nifty PE tumbles below 5-Year Median: Why it’s time to build a contra Portfolio

• The impact of the West Asia war on oil and gas prices
• Inflation risk
• Pressure on the Indian rupee
• Downward GDP growth projection
• India’s noticeable valuation premium compared to the MSCI World Index and emerging markets,
• FII outflows (at an all-time high),

Selling in heavyweight largecaps

That said, certain smart investors in the equity market are currently taking contrarian bets and seeing opportunity and value in the current market conditions.

Valuations Offering a Margin of Safety

The Nifty 50 index price-to-equity ratio is currently around 20.6, below the 5-year median of 22.2 (as of 15 May 2026).

The Froth in Nifty 50 has Settled Down

Even in midcaps and smallcaps, the froth has somewhat settled with valuations around 32.7 and 30.1 times, respectively, compared to the levels of 45-50 seen in the last 5 years.

For contrarians and value investors, this valuation reset across high-quality businesses is providing an entry window, offering a certain margin of safety.

While foreign investors are dumping equities, domestic investors, including fund managers, who perceive value and long-term opportunity amid the panic, are buying. They are taking contra bets across the market capitalisation segments, approaching stocks bottom-up, i.e. companies whose fundamentals seem strong but are either ignored or dumped by the markets.

Contra investing finds its place in Warren Buffett’s profound quote: “Be fearful when others are greedy and to be greedy only when others are fearful.”

This investment principle is at the core of Buffett’s investment philosophy. It explains that times of fear or panic in the market can be the best opportunity to invest, provided you do so sensibly.

Earlier, fund houses were allowed to offer either value funds or contra funds. This is because contra investing is essentially a subset of value investing. In other words, it has certain common elements of value investing.

However, vide a circular dated 26 February 2026, the capital market regulator, SEBI, has now permitted fund houses to offer both value funds and contra funds as part of their product basket, subject to the condition that the portfolio overlap between the two schemes shall not exceed 50%.

If you, too, wish to pursue contrarian investing, contra funds are a worthwhile option.

What are Contra Funds?

Contra funds invest 80% of their total assets in equity & equity related instruments following a contrarian investment strategy.

They find untapped opportunities in distorted valuations and out-of-favour stocks across market caps. They mainly follow a bottom-up approach, but sometimes go top-down to find companies in promising sectors/industries. Thus, there is a fair amount of diversification.

The focus is also on undervalued stocks trading at a significant discount to their fair valuation, which have been ignored by the market. This provides a margin of safety and the opportunity to realise attractive returns over the medium to long term.

That being said, contrarian investing requires patience; it could take time to reap noticeable gains. There is also the possibility that certain contra bets may not turn profitable; it could be a plain value trap or chances of investment judgment going wrong. So, the risk is high.

The Return Potential

A contra fund’s ability to consistently generate market-beating returns is hinged on how effective the portfolio management and sound risk management strategies are.  

The data shows that, currently, all 3 existing contra funds in the Indian mutual fund industry with an established track record have outperformed the BSE 500 TRI.

Performance of Contra Funds

Contra Funds	3-Yr (%)	5-Yr (%)	7-Yr (%)	Std. Dev (%)	Sharpe Ratio
SBI Contra	16.6	19.5	20.7	14.5	0.8
Kotak Contra	18.9	17.7	17.9	15.8	0.9
Invesco India Contra	17.7	15.9	17.2	16.1	0.8
Category Median	17.7	17.7	17.9	15.8	0.8
BSE 500 TRI	13.8	13.5	14.9	15.5	0.6

Which are the Contra Funds to Consider?

#1 SBI Contra Fund

Among the existing contra funds with a performance track record, SBI Contra Fund stands out for its longer-term returns (5-year and 7-year).

The fund has outperformed the category median and the benchmark, the BSE 500 – Total Return Index (TRI).

This has come on the back of active fund management, where the fund trades out-of-favour cyclical sectors, completely reshaping the underlying portfolio nearly twice a year.

Nonetheless, it has also demonstrated patience with select high-conviction stocks that have rewarded investors over time.

Currently, the fund has around 91% of its assets in equities. It is holding 82 stocks as per the April 2026 portfolio, of which largecap are nearly 60%, midcap 25% and smallcaps around 15%.

Portfolio of SBI Contra Fund

The top 10 stocks comprise around 32% of the portfolio, making it well-diversified, and include names such as HDFC Bank, Reliance Industries, Biocon, Tata Steel, ICICI Bank, etc.

Financials, energy & gas, and IT are the fund’s top 3 sectors, comprising nearly 52% of the portfolio.

Apart from equity allocation, the fund also has around 5% in debt & money market instruments, nearly 1% in REITs and 3% in cash & cash equivalents. 

The approach followed has helped the fund to keep risk in check (standard deviation of 14.5); in fact, it is lower than the category median and the BSE 500 – TRI. In other words, it is a low-risk, high-return contender.

With its impressive performance and over 25 years of track record, SBI Contra Fund is currently the largest fund in the contra funds category, with Assets Under Management (AUM) of Rs 47,352 crore as of 30 April 2026.

#2 Kotak Contra Fund

This fund, launched in July 2005, is relatively smaller-sized in the contra fund category with AUM of Rs 5,154 crore (as per the April 2026 portfolio).

Since its launch, it has clocked a respectable 16.3% CAGR. Over 5 and 7 years, the fund has clocked CAGRs of 17.7% and 17.9%, respectively, in line with the category median but higher than the BSE 500 – TRI.

It can be said that Kotak Contra Fund has made the best use of available opportunities, leveraging IQ and EQ (a mix of quantitative and fundamental analysis). The fund holds a high-conviction overweight or underweight position in stocks and sectors that are in sync with the IQ and EQ.

The fund is patient in its approach and has a low churn rate of 31.8% as of 30 April 2026.

Currently, the fund has nearly 99% of its assets in equities and 1% in cash & cash equivalents.

The fund currently has 60 stocks in its portfolio, of which largecaps are around 56%, midcaps 31%, and smallcaps 13%.

Portfolio of Kotak Contra Fund

The top 10 stocks account for about 33% of the portfolio and include HDFC Bank, ICICI Bank, SBI, Reliance Industries, and NTPC, among others.

Banking & financial services, healthcare, and IT are the top 3 sectors accounting for 45% of the portfolio as of 30 April 2026.

With a well-defined investment strategy along with investment processes and systems followed, the fund has exposed its investors to a reasonable level of risk (standard deviation of 15.8%) – in line with category median and marginally higher than the BSE 500 – TRI – and delivered appealing risk-adjusted returns (Sharpe Ratio of 0.9). In short, it’s a decent-performing contra fund.

To conclude

You may consider contra funds provided you have a high-risk appetite and an investment horizon of at least 5-7 years.

They may be held in the satellite portfolio with a small allocation (around 5-10%) rather than in the core portfolio. If the fund performs well, it can boost your overall portfolio returns.

Invest sensibly.

Happy investing!

Note: We have relied on data from www.screener.in, www.valueresearchonline.com, www.financialexpress.com, and the factsheets published by the respective fund houses throughout this article. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information. 

Growth and Direct Plan for all existing open-ended contra funds considered.

The returns data is expressed in CAGR. The returns data is as of 15 May 2026, while the risk ratios are as of 30 April 2026 and have been calculated using calendar-month returns over the last three years. Portfolio data is as of 30 April 2026.

Disclaimer

Disclaimer: The above content is for informational purposes only. Mutual Fund investments are subject to market risks. Please consult your financial advisor before investing.

Rounaq Neroy has over 20 years of experience in the financial markets and investments. He is a close observer of the Indian economy and writes deeply on the capital markets, mutual funds, stocks, precious metals, asset allocation, wealth management, and investment strategy. His editorials provide interesting, actionable investment ideas to guide readers in the journey of wealth creation and make wise decisions. Rounaq was the Head of Content at PersonalFN (Quantum Information Services Pvt. Ltd.), which also owns Equitymaster.com – India’s oldest and trusted equity research house.