Contra Funds vs Value Funds: Meaning and Benefits

In 2025, investors have multiple investment options that cater to their different investment needs. Depending on their investment style, risk tolerance, and financial objectives, investors can select an investment option from a wide variety of mutual funds. 

Among the myriad options, contra funds and value funds often attract investors’ interest due to their distinctive strategies to capitalise on market inefficiencies. In this blog, we will explore value funds and contra fund definitions, their approaches, benefits, differences, and investor profiles.

What is a Contra Fund?

A contra fund is an equity mutual fund that adheres to a contrarian investment strategy, which is investing against prevailing market sentiments. 

Contra funds in India primarily focus on companies that are currently underperforming in the short term or going in the opposite direction to the broader market trend, with the expectation that their value will eventually recover. The core belief is that market inefficiencies lead to the mispricing of these assets, which a contra fund seeks to capitalise on. These inefficiencies usually arise due to:

1. These companies are currently in their turnaround phase.
2. They are traded below their fundamental value.
3. They are likely to be beneficiaries of a business/sector upcycle in the near future.
4. They are growth companies but are currently derated.

Contra funds are required to invest a minimum of 65% of their total assets in equity and equity-related instruments. 

Managers of contrarian funds anticipate a future price recovery and purchase these stocks when they are considered to be trading below their intrinsic value. This rebound might happen when underlying problems are fixed, generating contra fund returns for the investors.

What is a Value Fund?

Value funds are open-ended equity funds that employ value investing, a strategy that involves buying stocks considered underpriced relative to their intrinsic value. These are usually companies with strong fundamentals but may be trading at relatively lower prices because of short-term inefficiencies in the market or due to a poor perception of investors. 

A pure value fund aims to purchase these stocks when they are discounted and wait till they reach their true value, leading to capital appreciation for investors.

According to SEBI’s rule, value-oriented mutual funds must have invested at least 65% of their assets in equity and equity-related securities. Unlike contrarian funds, value-oriented funds do not necessarily take a contrarian position. The stocks they invest in might be undervalued, but not necessarily falling in value or considered unpopular by the market.

Benefits of Investing in Contra Funds

Investing in contra funds in India offers several distinct benefits, especially for investors with a long-term perspective and high-risk tolerance. Here are the main advantages:

Potential for Attractive Returns

By investing in fundamentally strong companies at low prices, these funds have a higher chance of generating attractive contra fund returns when these stocks recover. This disciplined contrarian approach aims to capitalise on market inefficiencies and potentially deliver inflation-adjusted returns. 

Diversification Benefits

Best contra mutual funds often invest across various sectors, including those overlooked by other funds, which helps diversify a portfolio and mitigate risks. This can provide diversification in investment style as well. By building a diversified portfolio, fund managers help spread the risk within the portfolio and reduce the impact of any single stock’s poor performance on the overall portfolio.

Resilience During Market Downturns

Contra mutual funds may perform well during periods of broader market decline or shocks compared to other funds. Their ability to stay invested in unpopular sectors enables them to perform better during uncertain times, thereby supporting long-term wealth creation.

Cost-Effective Entry Points

Fund managers initiate positions when stocks are underperforming, allowing you to acquire quality stocks at attractive valuations. The strategy involves buying low and holding the funds until their value is recognised, potentially yielding attractive returns when market sentiment shifts.

Professional Management

Contra mutual fund investments give you access to expert fund management.  In-depth research and analysis are carried out by professional fund managers on behalf of you to find potential opportunities and make smart decisions about investments, increasing the overall returns on your investments.

Benefits of Investing in Value Funds

Investing in pure value funds offers several advantages, particularly for long-term investors seeking a balance between growth and risk management. Here are the key benefits:

Potential for Long-term Returns

Best value funds offer the potential for competitive returns as they invest in undervalued stocks that are expected to reach their fair price over time. This approach capitalises on the market’s eventual recognition of a company’s true worth, leading to long-term capital appreciation. 

Lower Downside Risk

These funds are generally less vulnerable to market fluctuations because they invest in fundamentally strong companies that are undervalued, which can act as a buffer against market volatility. 

Portfolio Diversification

Value-oriented funds invest in stocks across various sectors and market capitalisations, contributing to a well-diversified portfolio and a balanced risk-return profile. This flexibility ensures that you do not miss out on valuable opportunities simply because they belong to a certain sector or market size.

Access to Expertise

Investing in a value fund provides access to the expertise of experienced fund managers who specialise in identifying undervalued stocks through rigorous fundamental analysis. These professionals use their knowledge and market insights to select high-potential investments, simplifying decision-making for you and helping you navigate complex market conditions.

Contra Fund vs Value Fund: Key Differences

Here’s a comparison of contra funds and value funds that you should consider before adding them to your investment basket:

Choosing Between a Contra Fund vs a Value Fund: Which Investor Are You?

Choosing wisely between a contra fund vs value fund is important to generate attractive returns. You should consider:

• Contra Funds: Best suited for investors with a long investment horizon (5+ years) who are comfortable with short-term volatility. These funds are for those investors who are willing to go against the prevailing market sentiments and are looking for potentially attractive returns. They can be a good diversification tool for a portion of a well-balanced portfolio.

• Value Funds: Ideal for investors with a long investment horizon (5+ years) who prioritise capital preservation while seeking steady, long-term growth. Best value funds are suitable for those who believe in the intrinsic value of established businesses and prefer a less volatile investment journey.

The Bottom Line

Both contra funds and value funds offer unique paths to building wealth by focusing on undervalued opportunities. Contra funds are for those who want to go against the crowd and take calculated risks for potentially higher rewards, while value funds are ideal for investors seeking steady, research-backed growth with less volatility. 

Start exploring the contra and value funds by opening a demat account with Share.Market.

FAQs

1. What is the Primary Difference Between Contra Funds and Value Funds?

Value funds seek fundamentally strong companies that are currently undervalued by the market. Contra funds, on the other hand, actively go against market sentiment by investing in companies or sectors that are declining in the market.

2. Are Contra Funds Riskier than Value Funds? 

Yes. Contra funds tend to be riskier due to their contrarian approach of investing against the prevailing market sentiment, which might take longer to recover or may never fully rebound. Value funds, while not risk-free, typically invest in more established companies with a clearer intrinsic value, offering a higher “margin of safety.”

3. What is the Ideal Investment Horizon for Contra and Value Funds? 

Both Contra and Value Funds are best suited for investors with a long-term investment horizon, typically 5 years or more. This allows sufficient time for the market to recognise the intrinsic value of the investments and for the contrarian strategy to play out.

4. Can I Invest in Both Contra and Value Funds? 

You can invest in both types of funds. However, due to SEBI regulations, a single fund house cannot offer both a Contra Fund and a Value Fund. You would need to invest in these categories through different Asset Management Companies (AMCs).

5. Which Fund Type among Contra and Value Funds has Better Tax Efficiency?

From a taxation perspective, both Contra Funds and Value Funds are treated similarly in India, as they are both categorised as equity mutual funds by SEBI (since they invest at least 65% of their capital in equities). 

6. How do I Start Investing in Contra and Value Funds?

You can invest in contra and value funds through Share.Market.