ICICI Prudential Mutual Fund, one of the largest mutual fund companies in the country, has launched this type of fund. The aim is to find companies and stocks that the market currently dislikes, but which have the potential for further improvement. In market parlance it is called contrarian investing. So what is contrarian investing and how does it work? Let’s understand.
It is an open-ended equity scheme that works on a contrarian investment strategy (an investment strategy against the general trend of the market). Contrarian investing is based on the idea that markets often misprice assets and that mispricing is a natural feature of every asset class (be it equity, debt or real estate). You can invest in this fund till 12th October.
How to identify the right time
The scheme adopts a conservative and research-based approach to identify such opportunities. It is targeted at investors who want to invest with a long-term perspective and are prepared to wait for a change in market mood or sentiment. The scheme will be jointly managed by Sankaran Naren, Dharmesh Kakkar, Sakshat Goyal and Gaurav Chikne. Sankaran Naren, ED and CIO, ICICI Prudential Mutual Fund said, “Contrarian investing is not just about buying cheap things. It requires strong research and a long-term perspective. The specialty of contrarian investing is that we buy when the demand for the stock is low, when there are more sellers than buyers and hence its capital scheme is significantly reduced. Accordingly its price has fallen in different ways. It is convenient to do so. But our main focus will be on identifying stocks that have underperformed. The important thing is to identify the right investments through research and be patient to wait, as the reverse situation does not happen quickly.
How does the contra strategy work?
The idea behind this strategy is that the market doesn’t always value a company or asset accurately. Often times bad sentiment, fear or a temporary problem can cause shares of even good companies to fall significantly.
In such a situation, instead of following the crowd, the contrarian investor sees it
- Has the stock fallen too far?
- Is the company’s foundation strong or not?
- Is the problem temporary or permanent?
- Will earnings improve in future or not?
- How much upside can a stock have if the market outlook changes?
How to invest in it
When embarking on an investment, the team can thoughtfully choose a path that deviates from conventional wisdom. It looks for companies with healthy debt-to-equity ratios, monitors institutional stakes and looks for opportunities where sentiment is weak but growth potential with normalizing earnings. At the same time, it also carefully assesses those areas that have undergone major changes or upheavals. When the ‘contrarian mispricing’ ends, sentiment changes, or a better stock is found (which may provide a better investment idea), one can exit that stock. Mispricing is found in every corner of the market, creating opposite opportunities. This dilemma includes many challenges like global growth concerns, tensions in West Asia, withdrawal of foreign institutional investors (FIIs), major changes in the sector, central bank monetary policy, cyclical recession, highly indebted companies, valuations and earnings and depreciating rupee.
Differences in investment patterns in India and America
For example, the top 10 companies in the S&P 500 index in America now account for 38%, compared to 19% in 2016. This is because the dominance of a select few companies and the huge enthusiasm about AI is driving valuations to historic highs. In contrast, India sees more corporate participation in the market, but returns from different sectors are mixed and uneven. The gap represents a paradoxical opportunity in India, where lagging sectors are well-positioned for a cyclical recovery as market disparities narrow.
