Indian investors today are more engaged with equities than ever before. Mutual funds attracted a record ₹4.17 lakh crore of inflows in FY25, supported by monthly SIP contributions exceeding ₹20,000 crore. Yet, the bulk of this money flows into the familiar, large-cap, growth-oriented, and thematic funds aligned with market consensus.

By contrast, contra funds remain a niche. The combined AUM of top Contra funds, ₹70,127.89 crore, accounts for less than 1% of the ₹75.19 lakh crore Indian mutual fund industry, underscoring their niche appeal despite strong long-term returns, though 2024 proved their worth. Schemes such as the SBI Contra Fund and Invesco India Contra Fund delivered returns in the range of 25-32%, outpacing many growth peers. It’s a style built on independent thinking, spotting opportunity in neglect, and holding firm when crowd sentiment says otherwise.

The key question, then, is not whether contrarian strategies work; they often do, but whether they align with your risk appetite, time horizon, and financial objectives.

The Core Idea Behind Contrarian Investing

Contrarian investing is built on a simple observation: markets often overreact. Investors chase recent winners and abandon temporary losers, creating sharp swings in valuations. Stocks and sectors in favour are often bid up well beyond fundamentals, while those out of favour are punished more than they deserve.

A contrarian approach deliberately resists this herd behaviour. It involves:

• Buying undervalued or ignored companies/sectors when pessimism is widespread.

• Avoiding or trimming exposure to overhyped stocks where optimism has inflated prices.

The philosophy is rooted in behavioural finance. Investors commonly extrapolate past trends too far into the future, assuming winners will keep winning and losers will keep losing. Over time, however, fundamentals reassert themselves, and this mispricing creates opportunities for patient contrarian investors.

India offers plenty of examples:

• Public Sector Banks (PSUs): Written off by many investors in 2017–2019 due to mounting NPAs, they staged a strong comeback post-2021 as balance sheets improved and credit growth picked up.

• Technology Stocks: After the dot-com bust in the early 2000s, Indian IT companies like Infosys and TCS were deeply undervalued. Investors who entered then benefited enormously from the subsequent decade-long boom.

• COVID-19 Recovery: In 2020, sectors like travel, hospitality, and autos faced extreme pessimism. Investors who stayed contrarian and added exposure during lockdown lows saw outsized gains in the post-pandemic rebound.

Contrarian investing, therefore, is less about being different for the sake of it, and more about having the discipline to buy value when the market refuses to.

How Contrarian Investing Plays Out in India

Contrarian investing takes different shapes, but the unifying principle is the same: buy what the crowd is selling, avoid what the crowd is chasing. In the Indian market, this can play out in several ways:

a) Value-Oriented Contrarian

This strategy focuses on companies trading at low valuation multiples (P/E, P/B, or EV/EBITDA) relative to their fundamentals. Public sector banks, for example, were deeply out of favour between 2017 and 2019 due to high NPAs and governance concerns. Investors who picked quality names at depressed valuations benefited when the sector rebounded strongly after 2021.

b) Sectoral Contrarian

Entire sectors sometimes fall out of favour due to cyclical downturns or policy headwinds. Pharmaceutical stocks provide a good illustration, after struggling between 2016 and 2018 amid regulatory pressures, they regained leadership during the COVID-19 pandemic, rewarding those who stayed invested through the downcycle.

c) Turnaround / Distressed Plays

This involves investing in companies with strong underlying assets but temporary financial or operational challenges. The telecom sector, once written off due to intense competition and debt, eventually turned a corner after consolidation left only a few large players. Investors who entered during the stress phase were rewarded as the sector stabilised.

d) Special Situations

Here, the focus is on corporate events such as demergers, spin-offs, or asset sales, where short-term uncertainty can mask long-term value. In cement and financial services, for example, several conglomerate demergers created initial volatility but later unlocked substantial
shareholder value.

Is Contrarian Investing Right for You?

Contrarian funds aren't for everyone. They require patience and the ability to stay invested when the fund underperforms for extended periods.

Suitable for:

• Investors with a 5-7 year horizon

• Those comfortable with drawdowns of 20% or more

• SIP investors who can continue investing even when the fund is underperforming

• Those looking to diversify away from growth or momentum-heavy portfolios

Not ideal for:

• Short-term investors

• Those who follow market trends and popular sectors

• Conservative investors are uncomfortable with prolonged underperformance

In short, contra funds require patience and discipline. They work for investors who can stay invested even when the fund is out of favor with the market.

How to Access Contrarian Investing via Mutual Funds

For most investors, the most practical way to follow a contrarian strategy is through contra mutual funds. These are actively managed schemes where fund managers apply rigorous research to separate genuine opportunities from value traps. By investing in a diversified portfolio across multiple sectors, these funds reduce the risk of relying too heavily on a single contrarian bet.

Systematic Investment Plans (SIPs) add another important advantage. By committing small amounts regularly, investors are able to average their costs during weak phases while also avoiding the emotional bias of investing in “unpopular” areas. Even with modest monthly contributions, SIPs provide an accessible entry into a strategy that would otherwise demand deep research and patience.

In India, contra funds remain a niche category, accounting for less than two percent of total equity mutual fund AUM. Despite their size, they have shown strong results in certain cycles. In 2024, several funds in the category delivered returns between 25 and 32 percent, significantly outperforming benchmarks. The trade-off, however, was sharper drawdowns of around –18 to –20 percent and slightly higher volatility compared with large-cap or flexi-cap peers. Funds such as SBI Contra and Invesco India Contra illustrate how the strategy has played out across cycles.

This performance becomes clearer when compared with more familiar categories such as flexi-cap and large-cap funds (see table below).

Key Takeaways from the Comparison

• Contra Funds (SBI Contra, Invesco India Contra) have delivered the highest five-year returns (24–28%), but this outperformance has come with drawdowns of around –19% and slightly elevated volatility. They reward patience but test conviction.

• Flexi-cap Funds (Parag Parikh, Mirae Asset) offer a balanced approach, with returns in the 18–24% range. They provide diversification across market caps but are not immune to stress, as shown by drawdowns of nearly –19.4%.

• Large-cap Funds (Nifty 50 index funds, ICICI Bluechip) remain the most stable, with drawdowns of about –18% and volatility around 14%, but their returns (17–19%) have lagged contra and flexi-cap funds over the same period

What Should Investors Choose?

The comparison shows that each fund category has strengths and trade-offs. Contra funds have demonstrated superior returns, but only for those who can tolerate sharper swings and stay invested through difficult phases. Flexi-cap funds provide a middle ground, offering diversification and competitive performance, though they too experience stress in market downturns. Large-cap funds remain the most stable option, giving steadier though relatively modest returns.

In practice, there is no single “best” choice. The right option depends on an investor’s risk appetite, time horizon, and comfort with volatility. Many portfolios benefit from a mix—using large-cap funds for stability, flexi-caps for balance, and a measured allocation to contra funds for potential long-term alpha.

Pros and Cons of Contra Funds

Like any investment strategy, contrarian investing through mutual funds comes with both strengths and limitations. Understanding these clearly helps investors decide whether such funds align with their portfolios.

Pros

• Potential for superior long-term returns: By entering sectors and companies when they are most neglected, contra funds can capture strong gains when sentiment turns.

• Diversification benefits: Since they often allocate to areas underrepresented in broader portfolios, contra funds can reduce overexposure to popular sectors.

• Behavioral discipline: Investing systematically in unpopular areas helps counter herd mentality and introduces balance to an equity portfolio.

Cons

• Periods of underperformance: Contrarian bets can take years to play out, testing patience and conviction.

• Risk of value traps: Some companies may remain undervalued for structural reasons rather than temporary neglect.

• Higher volatility and drawdowns: Compared with large-cap or flexi-cap funds, contra funds typically experience sharper swings in performance.

Smarter Portfolios with MyFi

Contrarian investing can reward patient investors with higher long-term returns, but it also comes with sharper drawdowns and stretches of underperformance. The real task is balancing it with growth and stability.

MyFi makes this easier. You can now build and buy mutual fund portfolios directly on the app, swap underperforming funds, and create a personalised mix that aligns with your goals and risk appetite.

With patience, discipline, and smart tools like MyFi, contrarian investing can play a valuable role in your wealth-building journey.

Try MyFi today.

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FAQ

1. Are contra funds suitable for all investors?
No. Contra funds are best suited for long-term investors with moderate to high risk appetite who can tolerate short-term underperformance.

2. Can I invest in contra funds through MyFi?
Yes. MyFi allows you to buy contra funds directly on the app.

3. How does MyFi help improve my existing portfolio?
MyFi analyses your current holdings, highlights underperforming or high-fee funds, and lets you swap them for better alternatives seamlessly.

4. Why consider contra funds over flexi-cap or large-cap funds?
Contra funds may offer higher long-term returns by investing in out-of-favour sectors, but they also carry higher volatility. Flexi-cap and large-cap funds are generally more balanced or stable.

5. What makes MyFi different from a broker app?
Broker apps focus on transactions. MyFi goes a step further by helping you create, execute, and manage a personalised portfolio aligned with your goals and risk appetite.