Contra funds don’t suit India

Contra funds don’t suit India

 

It pays to think differently—especially if you are an investor in the stock market. No wonder mutual fund houses are warming up to the contrarian approach to investment. This means they invest in stocks and sectors that market players ignore because of short-term negative factors. Then they wait for the market to realise the full potential of these stocks. Fund houses like DBS Chola, Kotak, SBI, Tata and UTI already have contra funds in their stable. JM mutual fund is the latest to join the fray. Should you invest in a contra fund?
   “The contra fund is a fairly sound concept," says Sameer Kamdar, country head, mutual funds, Mata Securities. “However, existing funds have belied expectations.” Still, he is quick to point out that their lukewarm performance has more to do with the Indian stock market than with the fund houses themselves. “The Indian market has been a secular bull run in the last five years. Take any sector, be it banking, infrastructure, or the financial sector—every sector is up. Probably, the market is going to see a bull run for next five years or so. How do you adopt a contrarian approach in such a situation?”
   Kamdar adds that the performance of contra funds doesn't inspire enough confidence in him to recommend these schemes to anybody. “The average returns for contra funds for the past year is around 35%, whereas diversified funds returned around 48% in the same period,” he points out. “I would not advise it (investing in contra fund) as a mainstream strategy. In a market like the US, it would be a great idea to invest in a contra scheme, where you would find many sectors to invest,” he says.
   “As a concept, the contra schemes are a sound idea. When the market is in the grip of bears for a long time, they can actually deliver better returns,” says an investment advisor. “For me, it is part of my defence strategy against a fall in the market. Having a small percentage of your total equity portfolio in contra schemes would serve you well,” he adds.
   So if you think troubled times are just around the corner, contra funds are a great strategy. If you think the market is likely to boom in the coming years, you can give them a miss.

 

Source: Times of India, 16^th July 2007, Page 24