Contra Fund & Value Fund: which is best for investors?

• Sushil Bajaj |
• 2 September 2025 |

Wealth creation is what every mutual fund investment is ultimately about. Investors, however, are diverse in their goals, risk appetites, and approaches. Two such equity mutual fund schemes – Value Funds and Contra Funds – are confusing since both invest in undervalued companies. Philosophy as also methodology, though, varies significantly between the two. Let’s demystify distinctions between contra and value funds, similarities, taxation, risk, and make you conclude which one best belongs in your investment repertoire.

What is a Value Fund?

A Value Fund invests in companies whose equities are undervalued but have strong intrinsic values.

These companies usually have strong fundamentals, competitive advantage, or growth potential.

It is a philosophy known as “value investing” in which investors believe that one day or another the marketplace would realise such stock’s intrinsic value so their prices would increase in the longer run.

What is a Contra Fund?

A Contra Fund takes a contrary position – buying against the sentiment in the market.

They invest in companies undervalued or left behind by most investors.

These companies may be facing near-term adversity but have strong fundamentals and potential for delivering high returns in the longer run.

Comparison between Contra Fund and Value Fund

Criteria	Contra Fund	Value Fund
Investment Aims	Invests in stock/industries which are performing weakly but are likely to bounce back strongly	Invests in fundamentally strong businesses which are undervalued
Underlying Cause	Underperformance stemming from economic issues, political risk, or sector weaknesses	Undervaluation stemming from investor sentiment or informational imperfections
Risk Profile	High risk (subject to turnaround in losses incurred by companies)	High risk (subject to market appreciation in stock’s value)
Asset Class	Stock with low or negative performance today	Stock trading less than its true value
Investment Style	Contrarian, contrary to trend	Value-focused, uncovering significantly undervalued stocks

Similarity Between Contra and Value Funds

1. Taxation

Both value and contra funds are equity mutual funds; thus, the same laws apply for taxation:

• Dividend Income: Part of total income and taxed based on your slab.
• Capital Gains:
  • Short-Term (STCG): Sale within 1 year → 20% tax.
  • Long-Term (LTCG): Owned for more than 1 year → 12.5% tax for gains above ₹1.25 lakh.

2. Investment Horizon

Both need long-term dedication (5+ years) in order to enjoy market correction and compounding. These are appropriate for investors with patience and greater tolerance for risk.

Which is Better: Contra Fund or Value Fund?

• Contra Fund is best suited for aggressive investors with a belief in contrarian strategies and a willingness to take risks.
• Value Fund can be appropriate for those investors seeking undervalued, stable companies which are inherently strong but currently underpriced.

👉 SEBI rules prohibit a fund house from providing a value fund along with a contra fund at a specific moment in a bid to avert overlapped strategies.

Main Points

• Both value and contra funds are risky, long-term equity investments.
• Contra funds invest contrary to current sentiment in the marketplace, while value funds target fundamentally strong though undervalued equities.
• Both groups follow the same tax rules.
• Investors should make their decision consistent with their risk tolerance and investment philosophy.

FAQs on Contra and Value Funds

Q1. Are value funds and contra funds synonymous?
No. Contra funds acquire weak or forgotten stock companies whereas value funds acquire fundamentally strong companies quoted at a discount compared to intrinsic value.

Q2. Which fund is riskier: Contra Fund or Value Fund?
Both are risky because both rely on future changes in the market. But value funds are less risky because value funds invest in companies that are fundamentally strong.

Q3. How low is the minimum investment term for such funds?
5 or more years is best for both, so there are ample periods for cycles in the marketplace to complete themselves.

Q4. Can I start a SIP in contra or value funds?
Yes. Both kinds of funds can allow you to invest in AMCs at as low as ₹500 per month.

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