Should you invest in the Chola Contra fund?

SBI Mutual Fund set the ball rolling in July 1999 by launching Magnum Contra. After its phenomenal success, thanks to fund manager Sandip Sabharwal (now replaced by Sanjay Sinha), other fund houses followed suit.

 Last year, Kotak Mutual Fund launched its contra fund in July and Tata Mutual Fund in October.

Now it is Chola's turn which launched its contra mutual fund on Tuesday.

So what's a contra fund?

Contra funds are essentially diversified equity funds that invest in various stocks of various sectors. The difference being that they take a contrarian view to investing.

What this means is that these schemes aim to identify and invest in stocks of fundamentally sound companies that are trading on the bourses below their intrinsic value. Either these stocks have underperformed or not performed to their full potential.  The reason could be simply because they are out of favour with investors for some reason or the other, or have just been overlooked.

Contra funds, thus, are riskier than their diversified equity counterparts.

For one, they take bets on companies that are trading below their worth. If they make a wrong bet, they could lose heavily. So the risk of losing your money is higher than a normal diversified equity fund.

Moreover, a large part of the portfolios of contra funds are invested in mid-caps and small caps. These companies are more volatile than large-caps and are riskier investments than the established large caps. 

Magnum Contra has around 46% of its total portfolio in mid and small caps while the figures are 53% for Tata Contra and 63% for Kotak Contra.

Should you?

If you are prepared to stay in for the long haul, sure go ahead. But do remember, you must be prepared for a long wait.

The fund manager will identify a few good picks and invest in them and then wait for the market to notice them. Only once that happens will the price of the stock begin to move upward and subsequently get reflected in the Net Asset Value.

This could take a couple of years at the least. If you have the patience and are willing to block your investment for that long, consider it.  

Take a look at your other investments. Are you heavily invested in mid-cap stocks or mid-cap funds? Then you may not need to invest in this one. But, if you have invested sufficiently in diversified equity funds and in large cap stocks, then you could look at a contra fund.

It will add another investing style to your portfolio.

There are just four players to choose from: two being less than a year old and one just launched today. Hence, there is no sufficient long-term track record to go by. While Magnum Contra has performed extremely well, the fund manager quit and has been replaced by another in November 2005. Time will tell if it continues to perform as well.

Performance: Contra funds vis-a-viz diversified equity funds.  
 

NAV: As on January 16, 2006 for the growth schemes

 Chola Contra Fund

Initial subscription: January 17 to February 14, 2006.

Where it would invest: Between 65% to 100% of its assets in equities and up to 35% in debt and money market instruments.

Price per unit: Rs 10

Minimum investment: Rs 5,000 and multiples of Re 1 thereafter.

Entry load: 2.25% for investment up to Rs 1 crore.

All data has been supplied by Value Research.