The investment horizon of the fund is to achieve long-term capital appreciation by predominantly investing in equity and equity-related instruments through a contrarian strategy.
The fund will follow a top-down & bottom-up approach. The scheme will invest in stocks of companies, which are fundamentally sound but currently are undervalued due to prevailing market sentiments, macro-economic conditions or short term factors that have caused mispricing of their true long-term potential. In line with a contrarian investment approach, the Scheme aims to identify and invest in securities that the broader market may be overlooking, underestimating, or mispricing due to temporary challenges or negative perceptions.
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What CEO and fund manager say on this fund launch
Prateek Agrawal, MD & CEO : Market mispricings often persist due to behavioural biases and structural factors, and during periods marked by volatility, a contrarian strategy helps look beyond temporarily prevailing narratives and focuses on long-term business fundamentals. The Motilal Oswal Contra Fund is designed to identify these early signals and opportunities and invest in companies with relatively reasonable valuations. We maintain a high-conviction, actively managed exposure, diversified across market capitalisations, to benefit patient investors who are willing to stay invested over a full market cycle of three to five years, for true portfolio diversification.
Bhalchandra Shinde, Fund Manager : The persistent behavioural gap between a business’ intrinsic value and its market price is not an anomaly but a recurring feature that can create opportunities across market cycles. The Motilal Oswal Contra Fund focuses on building a high conviction portfolio of 30-35 stocks with strong operating cashflows, attractive valuations, and identifiable turnaround potential. Backed by a robust risk management framework and disciplined exit process, the approach aims to deliver style diversification while managing downside risks across market phases
What is contrarian investing?
A contrarian strategy is an investing style which typically invests against prevailing market trends. Contrarian investing seeks to identify investment opportunities in companies that are currently out of market favour or undervalued temporarily, yet exhibit strong fundamentals and a turnaround potential over the long term.
By adopting a long-term investment horizon over a complete market cycle, a contrarian approach allows investors to take a differentiated market exposure, benefiting from market inefficiencies such as price-value dislocations, while enabling portfolio diversification.As leadership rotates across sectors such as metals, real estate, banking, or auto, over various phases of market cycles, the need for diversified and differentiated investment exposure across such sectors has become increasingly important.
What does an expert say on this NFO and how a contra fund works
Experts typically ask investors to avoid investing in NFOs unless they offer something unique. The uniqueness could be that the scheme is offering an investment option that is not available in the market or offering something extra to an existing option. Otherwise, the experts believe investors are better off with an existing scheme with a long performance record. This is because you have some historical data to base your investment decision. You don’t have any data when it comes to new offerings.
Shivam Pathak, CFP and Founder of Asset Elixir told ETMutualFunds that a contra fund invests in segments that the market is currently avoiding. The Motilal Oswal Contra Fund will focus on fundamentally strong companies that are temporarily undervalued due to negative sentiment, macro factors, or short-term mispricing, with the aim of benefiting as valuations normalize over time.
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Aarti Desikan, Executive Director, Anand Rathi Wealth Limited shared with ETMutualFunds that the fund primarily follows an investment approach that focuses on sectors, segments, or stocks that are currently undervalued or facing temporary challenges but have the potential to recover over time and the fund’s main objective is to identify opportunities where market sentiment is negative, but the underlying fundamentals and long-term fundamentals remain intact.
Desikan further said that contra strategy’s primary objective is to invest in high conviction stocks & segments, instead of chasing momentum or popular themes typically backed by deep research, it follows a buy-and-hold approach, allowing time for the market to be familiar with value and for earnings recovery to play out.
Asset allocation
The fund will allocate 80-100% in equity and equity related instruments of companies which fit into the contrarian investment strategy (including derivatives), 0-35% in equity and equity related instruments of other than above companies, 0-35% in debt and money market instruments (including cash and cash equivalents), 0-10% in units of InvITS, and 0-5% in liquid and debt schemes of mutual fund.
Suitability and reasons to invest in contra fund
According to Motilal Oswal Mutual Fund, the fund is suitable for investors seeking to invest in under-valued and overlooked stocks – Requires Patience and investment horizon 3-5 Years may be considered to realise the potential from unlocking of contrarian opportunities, investors looking for an investment approach which may stay relevant during times of volatility, investors looking for diversification from mainstream growth investment opportunities, investors looking to invest in a differentiated product from high growth portfolios of Motilal Oswal Mutual Fund.
And lastly, investors seeking style diversification, with a focus on risk management may find this fund suitable.
A right time to bet on contra fund?
Desikan said investors can consider investing in contra funds as part of building strategy-based portfolios by diversifying across active diversified categories such as market-cap-based funds and strategy-based funds like contra and others, these categories are generally suitable for investors with an investment horizon of more than 3–5 years.
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“Additionally, in the current market environment especially after phases of volatility and broad-based corrections across the categories and mid & small cap segments. Markets were currently valued at fair valuations which has potential to offer better returns in coming periods”
She further said that investors are suggested to prefer investing across diversified equity funds rather looking only at contra funds as the universe of this category is very smaller and markets have tendency to undergo style performance cycle like sometimes value style may perform those times growth style likely underperform, this will add cyclical risk to contra funds.
Pathak said that this fund is suited for patient investors with a 5-7 year horizon who can handle short-term underperformance. In the Contra Funds, contrarian bets typically take 2-4 years to play out, making it unsuitable for short-term goals and periods of volatility often create the mispricing opportunities that such strategies aim to capture, supporting the timing rationale.
Why a contra fund now and can they outperform during market corrections?
According to the fund house, just 50 Stocks account for 55% of Mutual Fund Industry Equity Assets of Rs 50 lakh crore (All Equity & Hybrid Categories Including Passive Funds, excluding arbitrage), investors “may think” that they are diversifying across schemes or mutual funds, but in effect 55% of their money goes into a small set of 50 stocks, as such, investors portfolios may have overlapping exposures. They may think they are diversifying, but they may be just buying what the market loves in different ways and a contra fund helps investors take differentiated exposure and may help in ‘True Diversification’.
Pathak said yes-these are precisely the phases where contra funds deliver. In the Contra Fund, market corrections often lead to indiscriminate selling, allowing the fund to accumulate quality stocks at attractive valuations. Early recovery phases then drive re-rating of these overlooked names. However, the strategy may lag during strong, momentum-driven bull markets where growth stocks dominate.
Around three contra funds have completed three years of existence in the market. Kotak Contra Fund gave the highest return of 19.23% in the last three years. Invesco India Contra Fund gave 18.25% and SBI Contra Fund, the largest and oldest fund in the category, gave 16.89% return.
The performance of these funds in the last six months has been in red whereas that in the last nine months was mixed.
Looking at the historical performance, Pathak said that the outlook is selectively positive, as market opportunities are becoming more valuation-driven. However, since it’s a thematic style, limit exposure to 5–10% and use it as a satellite allocation alongside core diversified funds.
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Desikan said currently, after valuation corrections across categories and broader market segments; such an environment typically offers better opportunities for fairly valued stocks, where a contrarian strategy can benefit as fundamentals improve over time.
She further said that investors are not recommended to allocate more than 5% of the overall equity portfolio to contra funds as it is a very smaller universe and holds cyclical performance risk; instead investors can consider investing across diversified across the all diversified equity categories to reduce concentration risk of any single category performance and to ride across market cycles.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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