What is Contrarian Investing?

Contrarian investing involves making investments decisions that run contrary to the consensus. A contrarian believes that certain crowd behavior (e.g., panic selling) among investors can lead to mispricing in markets, which creates opportunities for profit. By acting contrary to the consensus, contrarians stand to profit when the sentiment turns.

Famous investor, Warren Buffett, sums up the essence of contrarian investing: be fearful when others are greedy and be greedy when others are fearful.

Volatility, a commonly used contrarian indicator

Contrarian investors commonly use volatility indicators to assist in their investment making decision. Volatility indicators are also known as fear indicators; it is well documented that in period of panic selling, volatility usually shoots through the roof. Contrarian investors use these indicators to predict the level of panic in the markets and act accordingly to capitalise on the opportunities to make profits.

In India, the volatility indicator catered for Indian markets is called India VIX and it is based on the Nifty 50 Index option prices.

Performance of FSM recommended contrarian funds against the BSE Sensex 100

In India, some fund managers follow the contrarian style of investing. Investors who are comfortable with contrarian investing could consider buying some of such funds. At Fundsupermart.com India, we recommend the SBI Contra fund and UTI Contra fund. Let’s take a look at how they perform against the benchmark BSE Sensex 100.

*UTI Contra Fund was launched on 26^th February 2006(source: iFAST Compilations)

The SBI Contra Fund has outperformed strongly against the benchmark consistently for the past 5 years. The UTI Contra Fund, a recently launched fund, has shown outstanding performance in the recent year.

Apart from performance, investors should also look for funds with low expense ratios to preserve most of the fund’s gains. Let’s take a look at the two funds’ expense ratio:

Both funds do not differ much in expense ratio and the SBI Contra Fund is slightly lower than the UTI Contra Fund.

Conclusion

Contrarian investing is a long-term strategy and is potentially very profitable. If you would like to have some exposure to contrarian investing, you can choose to add the recommended contra funds to your portfolio.