Introduction

• Contra funds help you outperform the market and earn excellent returns.
• Contra funds go against the current market trend and invest in stocks that are deemed unpopular.
• Contra funds can help you navigate the unpredictable market and unlock hidden opportunities for impressive returns on your investment.
• This article will explain all about contra mutual funds, uncover their inner workings, and shed light on essential factors to consider before investing.

What are Contra Funds?

• Contra funds are a type of equity mutual fund; they invest against existing market trends and purchase underperforming stocks.
• The fund managers adopt an opposite view of the stock when it is shunned by investors or when there is a superlative demand for it.
• The basic concept of contra funds is that any exorbitant price tends to normalize in the long run once the triggers subside. Therefore, contra funds invest in undervalued stocks with the potential to grow in the future.

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Who Should Consider Investing in Contra Funds?

• Contra funds are not suitable for risk-averse investors. They are apt for those who are risk tolerant, have patience, and have an investment horizon of over five years.
• These funds adopt the value investment strategy and pick undervalued securities that provide returns in the long run.
• To earn profits, investors need to wait until the stock ceases to underperform.

What are the Advantages and Risks of Investing in Contra Funds?

The key advantages of contra funds are:

• Generating superlative returns over an extended investment horizon.
• Building an effective hedge against a market correction.
• Tapping undervalued or overlooked investment opportunities.
• Getting diversification by investing in an against-the-wind strategy.
• Falling less if the market or the respective industry undergoes a correction.

The risks include taking longer to turn around or failing to do so. If the stocks never recover, the fund manager may decide to exit and accept losses. In that case, investors will suffer losses too.

What are Some Factors to Consider Before Investing in Contra Funds?

Some key factors to consider are:

• Contra funds, with a value investing philosophy, require a long investment horizon, usually five years or more.
• These funds generally appeal to aggressive investors.
• Market performance is irrelevant, as returns depend on individual stock performance.
• These funds carry higher market risks, and investors should research the fund manager's performance before investing.

Conclusion

• Contra funds offer the potential for excellent returns by investing against market trends.
• Consider these funds if you wish to outperform the market and are willing to navigate the unpredictable nature of the stock market.

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