The other day, a few of my friends were discussing which stocks to buy when the stock market is at such a high.
One of them flatly stated he was going to be a contrarian investor.
This sounded impressive till someone told him being a contrarian investor required a substantial amount of research, coupled with lots of conviction and courage.
"Oh, I plan to invest in contra funds," was his reply.
Contra funds? What's that?
Let's start by explaining what a contrarian investor and what a contra fund are.
Diversified equity funds are mutual funds that invest in the shares of various companies in different sectors.
In this respect, a contra fund is a diversified equity fund.
It parts company with other diversified equity funds in the types of stocks it chooses to invest in. As the name suggests, it follows a contrarian view to investing. This means the fund manager will deliberately bypass the popular stocks that everyone else is chasing. Instead, he will invest in companies that are not in fashion.
Why? Because these out-of-fashion stocks would currently be available at a cheap price since they are undervalued.
At the same time, contra funds do not invest in just about any stock. The stocks that are selected will be strong on fundamentals but their value will is not yet recognised by other investors. They must have the potential to rise substantially over time.
To spot such stocks requires a lot of research and understanding of the industry in question. That is why, if you want to be a contrarian investor, you should consider a contra fund. On your own, you may not be in a position to decide which stocks to go for.
To be a contrarian investor, you must be convinced the stock you choose to invest in has the potential to make it big. You must also have the courage to invest in it when everyone else is ignoring it.
Should you be a contra fund investor?
That depends on where you stand as an investor.
If you have not invested either in stocks or in diversified equity funds, then you should ignore this avenue of investment.
Investing in a contra fund makes sense only if you have already invested in a diversified equity fund and would like to experiment with an alternative investment style.
Secondly, are you willing to take a risk with your investment?
Don't forget, investments in a contra fund are more risky than those in a diversified equity fund.
All said and done, the fund manager is making a call on a company that may or may not eventually do that well and give a phenomenal return. He is taking a substantial risk.
Thirdly, are you willing to ignore this investment for a number of years?
It may take a fair amount of time for the company to start making huge profits and get noticed by other investors. Only when others see its potential and start buying the shares will the price begin to climb upward.
The players
If you feel you are ready for this investment, check out the players.
The latest in the arena is ING Vysya Mutual Fund. Named ING Vysya A.T.M. Fund, ATM being the acronym for Against The Market. It will be initially available for subscription till February 20, 2006.
During this period, you will not be charged any entry load (a fee charged when you invest in a mutual fund).
But, if you sell your units within 180 days from buying them, you will be charged an exit load of 2.25%. This is a percentage of the amount you have make when you sell your units.
So, don't sell in a hurry; if you hold on to your fund units for a certain time frame, you can generally avoid entry and exit load (check what the time period is for the fund you are investing in) unless the fund compulsorily charges a load.
Another brand new contra fund is the Chola Contra Fund. This is open for initial subscription till February 14, 2006. Here, there is an entry load of 2.25%.
The other players in this category are Magnum Contra, Kotak Contra and Tata Contra.
Most of the contra funds are not very old, hence it is difficult to monitor how well they have done.
Magnum Contra: July 1999 (launch date)
Kotak Contra: July 2005
Tata Contra: October 2005
Chola Contra: January 2006
ING Vysya Contra: January 2006
Magnum Contra has performed well and given a 33.78% return since its launch. Kotak Contra has delivered a 20.75% return, while Tata Contra has given a 4.28% return.
Do remember, however, that these are the returns since their individual launch dates, hence they do not make for a fair comparison.
Finally, with contra funds, you must take a long-term perspective into account. Invest in this fund if you have the patience to hold on to your units and are willing to block your money for some time.
All data supplied by Value Research.
