Mutual funds: Should you invest in SBI Contra Fund? Experts answer

SBI Contra Fund has carved a name and has performed well in the last few years. As per SEBI’s scheme categorisation and rationalization that came out in 2017, fund houses can launch a value fund or a contra fund.

Contra funds are equity-oriented funds that invest in a contrarian investment strategy. There are only three contra funds: SBI Contra Fund, Invesco India Contra Fund and Kotak Ind EQ Contra.

Let's look at the scheme's objectives. The fund aims at long-term capital appreciation by investing in a diversified portfolio of equity and equity-related securities by following a contrarian investment strategy.

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Returns

Now, let us see the returns generated by this fund.

The fund has beaten its benchmark, but it has performed better in the three and five years, beating the benchmark by a substantial margin.

Now, let us compare the performance of the fund with the other two contra funds.

It has also beaten the other two contra funds.

The attractive performance of the fund comes on the back of its investment strategy.

“The performance of the fund significantly improved after the change in the fund manager in 2018. We can see that the investment style of the fund is a mix of growth and value. Investment styles such as growth and value come in cycles. Sometimes, the growth style will do well and then it might not perform for quite some time. Hence, a blended investment style helps fund managers to offer decent returns irrespective of which investment style is in favour," said Mithun Desai, Founder of Jumbo Wealth.

He also added that the fund has investments in international stocks and aims to take cash calls, including arbitrage opportunities, when the market is overvalued or volatile.

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“Contra funds typically look for investment opportunities by going against the ongoing market trend. This fund had a tough time during the 2017 till 2019 period when the markets were polarised, and were largely driven by few select growth-oriented index heavyweights, rendering the investment approach out of favour. However, it started to perform well during the post Covid rally, with segments which were stressed earlier started to do well. For this fund, since Jan 2020 – April 2023, the major contributors to the performance have been stocks from the financial services, industrials, and consumer cyclical sectors,” said Himanshu Srivastava, Senior Research Analyst at Morningstar.

As per Value Research data, the fund invests 90.2% of its in equities and the remaining in debt and cash equivalent instruments. The fund has a diverse holding with 76 stocks in its portfolio, which is a mix of large cap, mid cap and small-cap stocks in its portfolio. Data shows that the fund invests 29.11%, 22.03%, 33.46%, and 15.40% of its assets in giant, large, mid and small-cap stocks.

Dinesh Balachandran has been managing the fund since May 2018. The attractive performance of the fund has helped the fund to garner significant assets. The Assets Under Management (AUM) of the fund is ₹10,565 crores, which is second in line if we club value and contra funds together.

If we look at the sectoral holding, the fund invests in 16 sectors, with the highest allocation in the financial sector at 21.69%, followed by energy at 16.97%.

Risk

The fund stands tall when it comes to its risk parameters.

The fund has a high Sharpe ratio of 2.27. A Sharpe ratio above two is excellent as it means the fund has been able to generate better returns compared to the risk taken by the fund.

For comparison, we can see that the Sharpe Ratio of the other two funds, i.e., Invesco Ind Contra and Kotak India EQ Contra stands at 1.46 and 1.63, respectively.

Should you invest in SBI Contra Fund?

Overall, the fund has been a consistent performer in the last few years.

However, investing in a fund just by looking at its past records might not be wise. Also, the fund is one of the three contra funds currently available for investors, making it a niche fund category.

"Experienced mutual fund investors who want to take a tactical call in their mutual fund portfolio can look at this fund. However, it will be best to keep the total investment in this category not more than 10-15% of their equity portfolio," said Mithun. (Returns as on 12-June-2023)

Padmaja Choudhury is a freelance financial content writer. With around six years of total experience, mutual funds and personal finance are her focus areas.