Mutual funds are one of the most popular investment options available in the market these days. There is a lot of advertisement and literature about what is mutual fund which is why people generally know what they are and how they work. However, with the recent SEBI guidelines on mutual fund reclassification, mutual funds are more streamlined. But investors need to update their knowledge on the different types of mutual funds.
While investors know equity mutual funds based on market capitalization, they generally do not have an understanding of equity based funds which have an investment strategy. Value funds and contra funds are two of the popular fund types among these. Here, we understand what is mutual fund and examine two fund types and understand the difference between them.
What is a value fund?
A value fund is a fund that invests in stocks that are currently undervalued by the market. The fund manager and the research team generally works on the intrinsic value of the equity shares and invest in those shares whose current market prices do not accurately reflect its intrinsic value.
Value based investing is a strategy followed by investors like Warren Buffet and value funds in particular focus on making such type of investments. This class of investing generally believes that the stock market has inefficiencies which means some stocks trade below their true value.
By investing in undervalued shares, the fund hopes to gain when the market truly recognises the intrinsic value of these shares.
What is a contra fund?
A contra fund adopts a contrarian investment strategy to that followed by a majority of investors in the market. The fund managers generally invest in stocks that are underperforming in the market that are not chosen by most of the investors.
This investment strategy puts funds in stocks that are ignored by the market and sectors which do not get much investor attention. The underperforming stocks mean that the sector does not give returns as much as it is worth. However, the fund strategy is that this contrarian bet will perform well in the long run.
Difference between value fund and contra fund:
Similarity between value fund and contra fund:
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