Difference between Value Funds and Contra Funds
13 June, 2025
Synopsis:
Value Funds invest in strong companies that are temporarily undervalued. They follow a stable, low-risk approach, aiming for steady long-term returns and dividend income.
Contra Funds invest by picking stocks contrary to the popular market sentiment betting they will bounce back. This high-risk strategy relies on smart timing and deep market insights.
Investors can prefer Value Funds for safer, steady growth, and Contra Funds if they are open to risk and believe in bold, contrarian investments for high potential returns.
Imagine two shoppers during a sale. One buys branded clothes at a discount, knowing their quality is proven, like a Value Fund Investor. The other ignores the discount, believing the trend will change, like a Contra Investor. Both spot potential but use different mindsets to make the most of it.
Value Funds and Contra Funds may seem similar, but their strategies differ in subtle yet important ways. Understanding how each fund type works can help investors choose the right path for long-term wealth creation.
Understanding the Basics
When it comes to mutual fund investing, not every undervalued stock is approached the same way. Both Value Funds and Contra Funds focus on stocks that are currently underperforming or undervalued, but the philosophy and strategy behind each are distinct.
Let's break it down.
What Are Value Funds?
Value Funds follow a disciplined investing approach. Fund managers actively seek out stocks that are currently trading below their intrinsic value. These could be companies with strong fundamentals but facing temporary challenges, like regulatory issues, market corrections, or sector-specific setbacks.
The aim here is to buy low and hold long, believing that these companies will bounce back and deliver returns as the market re-evaluates their true potential.
Characteristics of Value Funds:
Investment Philosophy: Value funds focus on investing in companies that are undervalued relative to their intrinsic worth. These companies typically have strong fundamentals but are trading at prices lower than their true value due to temporary market inefficiencies.
Risk and Volatility: Value funds are generally considered to have moderate risk. They tend to be less volatile than growth funds, as they invest in established companies with stable earnings.
Return Potential: These funds aim for steady returns over the long term, capitalising on the market's eventual recognition of the undervalued stock's true worth.
Ideal for: Investors seeking long-term growth with moderate risk.
What Are Contra Funds?
Contra Funds, on the other hand, take a contrarian approach. These funds invest in sectors or stocks that are currently out of favour with the market. They invest against prevailing market sentiment.
The fund manager here goes against the tide, investing in areas where the broader market sees risk but where contrarian analysis identifies hidden opportunities.
Characteristics of Contra Funds
Investment Philosophy: Contra funds adopt a contrarian investment strategy, investing in stocks that are currently out of favour or undervalued by the market. The belief is that these stocks have the potential to rebound in the long term.
Risk and Volatility: These funds are considered high-risk, as they often invest in sectors or companies facing temporary challenges. The success of this strategy heavily depends on the fund manager's ability to identify genuine turnaround opportunities.
Return Potential: If the market sentiment shifts and the undervalued stocks recover, contra funds can offer significant returns. However, this is contingent on accurate stock selection and timing.
Active Management: Contra funds require active management, with fund managers conducting in-depth research to identify high-potential undervalued stocks and determine the optimal time to invest.
Ideal for: Investors with a high-risk tolerance, patience, and a long-term investment horizon who believe in the potential of contrarian strategies.
Key Difference between Value Funds and Contra Funds
Feature | Value Funds | Contra Funds |
Investment Philosophy | Invest in undervalued companies with strong fundamentals | Invest against market sentiment in underperforming or ignored sectors |
Market Timing | Not focused on timing; prefers holding undervalued stocks | Takes advantage of market misjudgement and trend reversals |
Risk Level | Moderate | Relatively higher |
Fund Manager Role | An analytical approach to find the intrinsic value | Contrarian thinking and deep market insight |
Which One Should You Choose?
The choice between a Value Fund and a Contra Fund depends heavily on your investment mindset, time horizon, and risk appetite.
If you prefer a stable investment strategy that focuses on fundamentally strong companies temporarily trading at lower prices, Value Funds could be the right fit. However, if you are open to higher risk and believe that underperforming or neglected stocks may recover in the long term, Contra Funds may align better with your investment approach.
Value Funds and Contra Funds may walk similar paths, but they follow different compasses. One trusts the power of intrinsic value, and the other bets against the crowd. Both demand patience but reward differently. As an investor, understanding the differences between the two funds can help you make smarter decisions aligned with your personal objectives and market outlook.
Explore expert-curated Value and Contra Fund options on the HDFC Bank SmartWealth App, designed to simplify investing for every kind of investor. Download the App now and take control of your financial journey!
Disclaimer: This communication has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. HDFC Bank Limited ("HDFC Bank") does not warrant its completeness and accuracy. This information is not intended as an offer or solicitation for the purchase or sale of any financial instrument / units of Mutual Fund. Recipients of this information should rely on their own investigations and take their own professional advice. Neither HDFC Bank nor any of its employees shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this material. HDFC Bank and its affiliates, officers, directors, key managerial persons and employees, including persons involved in the preparation or issuance of this material may, from time to time, have investments / positions in Mutual Funds / schemes referred in the document. HDFC Bank may at any time solicit or provide commercial banking, credit or other services to the Mutual Funds / AMCs referred to herein.
Accordingly, information may be available to HDFC Bank, which is not reflected in this material, and HDFC Bank may have acted upon or used the information prior to, or immediately following its publication. HDFC Bank neither guarantees nor makes any representations or warranties, express or implied, with respect to the fairness, correctness, accuracy, adequacy, reasonableness, viability for any particular purpose or completeness of the information and views. Further, HDFC Bank disclaims all liability in relation to use of data or information used in this report which is sourced from third parties.
HDFC Bank is an AMFI-registered Mutual Fund Distributor & a Corporate Agent for Insurance products.
