Contra fund and value fund are two types of mutual fund investment schemes available in India, each with its own set of distinguishing characteristics. A contra fund uses a contrarian investment strategy, whereas a value fund invests in undervalued stocks.
As an investor, understanding the difference between a contra fund vs. a value fund is essential to making informed investment decisions. In this article, we are going to explore each of these two mutual funds individually and a detailed comparison of contra funds vs. value funds.
What is a contra fund?
A contra fund is a type of mutual fund that employs a contrarian investment approach. A contrarian strategy involves identifying and investing in assets that are underperforming in the market. When the market finally realises the real worth of the assets, the prices will go up, producing high returns. Contra funds often focus on investing in assets that are going through short-term price declines. Read more about, What are contra mutual funds.
What is a value fund?
A value fund, on the other hand, is a type of mutual fund that focuses primarily on investing in undervalued companies. Undervalued companies are those whose intrinsic value is much higher than their current market price.
Value funds extensively use fundamental analysis to identify undervalued companies and invest in them. The logic behind this approach is that the markets may take time to realise the true worth of a company and once it does, the stock price will appreciate, producing high returns. That being said, capital appreciation in undervalued stocks could potentially take a lot of time, making value mutual funds ideal for long-term investors. Read more about, What is a value fund.
Contra funds vs. value funds: A tabulated comparison
Here is a quick tabulated comparison of the differences between these two types of mutual funds.
| Particulars | Contra Funds | Value Funds |
| Type of Assets | Stocks, bonds and other financial securities | Primarily stocks |
| Primary Focus | Underperforming assets | Undervalued stocks |
| Analysis | Market sentiment and short-term fluctuations | Fundamental analysis |
| Risk | High risk | Not as high risk as contra funds |
Differences between value and contra funds
Now that you have seen what these two mutual funds are, let us compare value funds vs. contra funds to determine the differences.
- Investment objective
The primary objective of contra funds is to go against the prevailing market trend and invest in assets that are presently underperforming due to short-term factors.
Value funds, on the other hand, identify and invest in undervalued stocks with strong fundamentals and the potential for long-term capital appreciation. - Underlying factors
Contra funds rely on factors such as market sentiment, short-term fluctuations and the potential for a rebound when identifying assets and making investment decisions.
Value funds base their investment decisions on fundamental analysis and factors such as earnings, book value and dividends. - Risk profile
Contra funds are considered to be high-risk investment options since they involve going against the prevailing market trend in the hopes of a potential rebound which may or may not happen.
Value funds, on the other hand, are not as risky as contra funds since they focus on investing in financially stable companies that are undervalued. However, value funds require patience since it may take a long time for the market to realise the potential of undervalued companies. - Asset class
Contra funds may invest across asset classes such as stocks, bonds and even in commodities depending on the fund’s mandate.
Value funds primarily invest in the equity segment focusing on stocks that are trading at a discount to their intrinsic value.
Contra fund vs. value fund: Which is better?
Contra Funds may offer higher potential returns, especially if the assets they invest in rebound as expected. However, the funds are very susceptible to increased volatility and risk. Value funds, on the other hand, are comparatively more stable and have long-term growth potential. This makes them more suitable for investors with moderate risk tolerance levels.
That said, when choosing between a contra fund and a value fund, remember to account for factors such as your risk tolerance, investment horizon and financial goals. This will help you make a well-informed decision.
How to make a choice between contra funds and value funds?
The choice between contra funds and value funds can be difficult because the two categories may overlap slightly. This is because both types of funds often choose companies that may be currently out of favour with the market. Value funds choose companies that are undervalued by the market, while contra funds choose companies that the market is currently avoiding.
To make a decision between these two fund categories, you need to understand your risk tolerance levels. If you are comfortable with higher levels of risk, contra funds may be a fine addition to your portfolio. Otherwise, value funds that invest in fundamentally strong companies may be a safer choice.
How contra funds and value funds are similar?
In addition to their similarities in choices, contra funds and value funds are also similar in a few other ways, as outlined below:
- Tax regulations
Both contra funds and value funds are taxed as equity mutual funds. This means any dividend income they offer will be added to your total income and taxed as per the income tax slab rate for FY 2024-25 applicable. Short-term capital gains (earned if the funds are held for less than 12 months) are taxed at 15%. Long-term capital gains (earned if the funds are held for 12 months or more) exceeding Rs. 1 lakh are taxed at 10% without indexation. - Investment horizon
Contra funds and value funds are both better suited for investors with a long-term outlook. This is because potential capital appreciation may only occur over several years.
Conclusion
With this, you must now be aware of the differences between a value fund vs. a contra fund. Both these mutual fund schemes are good long-term investment options that you can consider investing in. But before you proceed to choose between the two, remember to consider factors such as your risk tolerance, investment horizon and financial objectives. This will help you make the right investment decision.
You can also head over to the Bajaj Mutual Fund Platform to help you pick the right mutual fund for your goals. The platform’s mutual fund compare tool lets you compare multiple funds across different metrics. Additionally, you can also use the SIP calculator and lumpsum calculator to estimate the returns you are likely to get from your investments.
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