Contra bet! With 68% AUM jump in April, what’s fueling rally in this equity MF category?

Contra/value equity mutual funds’ net assets under management (AUM) jumped 68% in April to Rs 1,57,946 crore versus Rs 94,050 crore in the corresponding period of the last financial year. ETMutualFunds explains why this category, which invests in out-of-favour or undervalued stocks, is gaining ground among investors and who should take a leap!

Investors with a higher risk appetite and those willing to sail against the tide of prevailing market trends, may look to invest in value/contra funds, experts say, adding that these schemes invest in overlooked or mispriced stocks that could turn into potential money spinners.

Growth path
With active 23 schemes, this category has seen addition of just one scheme over April 2023 tally. However, the number of folios climbed to 63,48,393 from 47,14,942 in April 2023. This translates into a 34% year-on-year jump.

In terms of its AUM share, contra/value funds accounted for 6.4% of the combined AUM of eleven equity-oriented categories at Rs 24,74,323 crore in April 2024. In April 2023, it was 6% of the combined AUM of Rs 15,84,551 crore.
Net inflows have also remained consistent until April this year and were recorded at Rs 7,404 crore.

“With some sectors and stocks reaching peak valuations, many investors are now looking at opportunities that are still priced attractively and where there is probable greater upside. This is where contra funds come in as they are able to take advantage of mispriced opportunities that are currently available. Incidentally, most investors look at contra investing as a safe play in such situations when market valuations are stretched and expected market volatility is high,” said Gautam Kalia who is CAIA, Head – Super Investor at Sharekhan by BNP Paribas.Calling ‘mispricing’ or remaining ‘out of favour’ as a virtue, Alekh Yadav, Head of Investment Products, Sanctum Wealth said that these attributes make specific stocks prime targets of contra and value investors. Once less lucrative, stock/sectors related to energy, defense and PSU have found their worth with the contra/value investors, Yadav opined.There are currently 23 active schemes in which 20 are value funds while three are contra. While industry body – Association of Mutual Funds in India (Amfi) has clubbed them into one, Ace Equities treats them as separate categories.

Average year-to-date returns delivered by contra/value funds is around 13% which is an outperformance over the average returns of 10% given by their respective benchmarks. According to Ace Equities data, average returns of 20 active value funds stood at 12.72% as on May 29 while those by three contra funds stood at 13%.
In the value fund category, the top five performers are Quant Value Fund-Reg(G), JM Value Fund(G), HSBC Value Fund-Reg(G), ITI Value Fund-Reg(G) and Tata Equity P/E Fund(G) which have given returns between 26.39% and 14.20%.

Meanwhile contra funds viz. Invesco India Contra Fund(G), Kotak India EQ Contra Fund(G) and SBI Contra Fund-Reg(G) have given returns of 14.62%, 14.98% and 12.68%, respectively.

Opportunity beckons
Yadav sees an opportunity coming in the form of general election results. While NDA is expected to reach the finish line according to popular views, a different outcome in the form of a hung parliament or India alliance getting an edge, could trigger deep corrections in stocks. “Market corrections often present attractive opportunities for contra and value-oriented funds to identify undervalued assets,” the Sanctum Wealth analyst said.
Kalia echoed similar sentiments, maintaining that contra funds offer an opportunity to capitalise on missed opportunities as we inch closer to June 4 when results will be announced. In his view, contra/value investments have limited downside risk having not participated proportionately in the recent market run-up.

Caveats
Investors with a long term horizon should enter the space, these experts said. “It is important to keep in mind that these are ideas that are not in favour of the market and hence it could take a while before the market recognises them. Keeping a minimum investment horizon of five years is essential so that you are able to let the strategy of the fund play out,” Kalia suggested.

As the inherent tenet of contra/value funds is to act contrary to the market trends, they could underperform when mainstream funds are doing well and outperform when the rest of the market is underperforming, Yadav pointed out.

Also Read: Modi 2.0: Gold ETFs’ AUM jumps 565% to Rs 32,800 crore in 5 years, folios rise by 1,483%

(Data Inputs: Surbhi Khanna)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)