Investors today face a wide range of choices when it comes to mutual funds, and two categories that often create confusion are contra funds and multicap funds. Both aim to build wealth over time, yet they follow very different strategies.
While contra funds focus on undervalued opportunities that the market overlooks, multicap funds spread investments across companies of different sizes to balance growth and stability.
In this article, we will explain their features, differences, and key points to consider before investing.
What Are Contra Funds?
Contra funds are equity mutual funds that pick stocks the market is currently ignoring or undervaluing in expectation of long-term gains.
Fund managers using this approach seek out companies with sound fundamentals but negative sentiment or temporary setbacks. These funds tend to demand patience, since the downside risks are higher and recovery can take time.
What Are Multicap Funds?
Multicap funds are equity mutual funds that invest across companies of all sizes (large-caps, mid-caps and small-caps) within a single portfolio.
They provide built-in diversification, letting fund managers adjust allocations between market segments based on economic cycles and valuation. Because of their mix of stable and high-growth stocks, they aim to balance risk and returns.
Key Differences between Contra vs Multicap Funds
To understand how contra funds and multicap funds differ in meaningful ways, consider the following comparison:
| Feature | Contra Funds | Multicap Funds |
| Strategy aim | Invest in stocks or sectors currently out of favour. The expectation is that they will recover over time. | Invest across large-cap, mid-cap, and small-cap companies. The aim is to capture growth opportunities and diversify risk. |
| Equity exposure/allocation | These funds have a high equity component. They focus on undervalued or underperforming equities. Patience is required for turnaround. | They must maintain a minimum 75% equity exposure. SEBI rules require a minimum 25% allocation to each cap segment. |
| Risk-return profile | The risk is higher, but returns can be attractive in the long term. Volatility may be high. There is also a chance of downside if recovery does not happen. | The risk is moderate to high. Diversification across different company sizes spreads risk. Returns are steadier compared to focused or contrarian strategies. |
| Time horizon | They are suitable for long-term investment. Recovery may take years. They are not designed for short-term gains. | They are suitable for medium to long-term investment. Growth can be seen over 5 to 7 years or more. Their flexibility helps in adapting to market cycles. |
| Manager’s role/dependency | The fund manager’s role is crucial. They must identify mispriced and overlooked opportunities. Success depends on their timing and judgment. | The fund manager’s role is important too. Their main task is to balance allocation across different cap segments. |
What Investors Should Evaluate Before Choosing
Following an understanding of what contra and multicap funds are and how they differ, investors should carefully examine several factors before selecting one.
1. Risk Tolerance
Understand how much volatility you are comfortable with. Conta fund needs high risk tolerance than multi cap funds.
2. Investment Horizon
Consider how long you plan to stay invested. Contra funds typically require longer timeframes than multicap funds.
3. Fund Manager’s Track Record and Strategy
Review how the fund manager has performed in both good times and bad times. Have they handled turnarounds before in similar market situations for contra funds? For multicap funds, examine how they balance allocations among different cap segments and manage risk. Skill in reading markets and disciplined stock picking is especially important for contra funds.
4. Expense Ratio and Costs
Every fund charges fees for management, operations, etc. A high expense ratio can eat into gains, especially over long periods. Compare costs among similar funds: if two funds deliver similar gross returns, the one with lower fees will deliver more to you net of costs.
Conclusion
Investors in contra or multicap funds must align choices with their goals and risk tolerance. Contra funds demand patience and conviction during periods of underperformance, whereas multicap funds offer built-in balance across market-cap tiers. Success depends on evaluating the fund manager, costs, horizon, and one’s own financial plan.
