If you are looking to invest in undervalued shares, you can choose between contra funds and value funds. While both aim to capitalise on undervalued opportunities in the market, their strategies diverge significantly. Contra Funds adopt a bold contrarian approach, investing in stocks or sectors currently out of favour with the market but anticipated to rebound.
On the other hand, value funds focus on stocks trading below their intrinsic worth due to market inefficiencies, relying on fundamental analysis to unlock their potential. If you want to learn more about these funds, this blog will help you understand their definition, the difference between contra fund vs value fund and more.
Understanding Contra Funds
A contra mutual fund takes a contrarian approach by investing in stocks that are currently underperforming or out of favour with the market. The fund manager adopts a contrary perspective, buying stocks when investors avoid them or when there is excessive demand for specific stocks.
The fund seeks to capitalise on distorted asset values caused by overperformance or underperformance. The underlying belief is that an asset’s price, which may be inflated or deflated, will eventually stabilise in the long run once the factors influencing it are resolved.
In a contra mutual fund, the manager buys stocks at prices lower than their anticipated long-term value. This strategy may involve investing in sectors experiencing a downturn due to prevailing market conditions.
The fund holds onto these stocks until demand rebounds. It is important to note that these funds typically perform better over the long term, making them unsuitable for short-term investments.
Understanding a Value Fund
Value funds are mutual funds that follow a value investing strategy. This strategy involves identifying and investing in stocks currently undervalued in the market, meaning their market price is lower than their intrinsic value.
If you are seeking long-term growth you may prefer this approach, as value investing aims to take advantage of market inefficiencies and potentially deliver higher returns over time. While value funds tend to be less volatile under certain market conditions, they still carry risks, including interest rate risk. It is also crucial to assess the fund’s past performance.
A value fund is a type of mutual fund that invests in stocks of undervalued companies, trading at a discount but with strong fundamentals and growth potential. In addition, fund managers use fundamental analysis to identify these companies, often undervalued due to market inefficiencies or short-term factors.
Main Differences Between Contra Funds and Value Funds
Follow this table to learn the key differences between contra funds vs value funds:
| Aspect | Contra Funds | Value Funds |
| Investment Goal | Contra funds invest in stocks or sectors that are currently underperforming but are expected to do well in the future. | Value funds invest in undervalued stocks but have strong growth potential. |
| Underlying Reasons | Stocks may be underperforming due to economic, political, or sector-specific factors. | Stocks are undervalued due to market deficiency, investor sentiment, or similar factors. |
| Asset Category | Falls under the equity asset class, investing in stocks with current negative returns, anticipating future value growth. | Also falls under the equity asset class, investing in stocks priced below their intrinsic value, with the expectation of price correction over time. |
How to Decide Between Contra and Value Funds?
Choosing between contra funds and value funds can be challenging, as there is some overlap between the two.
Both types of funds typically invest in companies that are currently out of favour with the market. Value funds focus on undervalued companies, while contra funds target those that the market is actively avoiding.
To decide between these options, it is important to consider your risk tolerance. If you are comfortable with higher levels of risk, contra funds might be a suitable addition to your portfolio. However, if you prefer a safer approach, investing in value funds with fundamentally strong companies can be a better choice.
Final Thoughts
After understanding value fund vs contra fund, when it comes to long-term investments, both value funds and contra funds are excellent options to consider.
However, before making your choice, it is essential to assess factors like your risk tolerance, investment timeline, and financial goals. These elements will guide you in selecting the right investment strategy.
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