Typically, contra funds invest in fundamentally sound companies, which are currently out of favour but have the potential to clock above-average growth in future. This style of investment draws from the value style of investing. Simply put, it involves identifying fundamentally sound stocks, which are trading at a discount to their fair value. Usually the fund manager buys these stocks and holds them until the mis-pricing in the stock value gets corrected.
Lotus India Contra Fund (LICF), an open-ended diversified equity fund will adopt the contrarian style of investing for generating capital appreciation. This style of investing works particularly well during the bear phase in stock markets when the fund manager has plenty of investment opportunities that qualify as contrarian picks. During a stock market rally (like the one we have been witnessing for nearly four years now), contrarian picks are a little hard to come by.
Investors must appreciate that the contra style of investing requires some patience and forbearance on their part before they see results. If the fund manager does indeed identify investment opportunities earlier on and is willing to wait patiently until the stock/theme unlocks its potential value, then the 3-Yr time frame that we consider mandatory for equity investing, might not prove sufficient. So investors in contra/value style funds must aim for a longer investment horizon (at least 5 years).
For investors looking at investing in contra/value style funds we recommend DSP ML Equity Fund, a well-established value style with an impressive track record over the long-term (38.6% CARG over 3-Yr, 42.6% CAGR over 5-Yr). Since Lotus India Mutual Fund has yet to make its presence felt in the domestic fund management industry (it launched its first equity fund last year), investors should first evaluate its investment approach and processes over a 3-5 year time frame and across market cycles (particularly the downturns) before committing money to the fund house.
Read what we wrote about the Lotus India Tax Plan NFO