SBI Contra Fund vs Kotak India EQ Contra Fund: Which Is More Resilient in a Volatile Market?

This growing interest in contrarian strategies is driven by the current market conditions, where global uncertainties and shifting economic trends are leading to market mispricing, offering the potential for long-term gains for investors who dare to take a contrarian approach.

What Are Contra Mutual Funds?

Contra Funds are a type of equity mutual fund that follows a contrarian investment strategy. The fund managers of contra funds typically take positions in companies that are facing short-term challenges but have strong fundamentals and long-term growth potential.

[Read: What Is Contra Funds And Which Are The Best Ones]

The idea is to purchase these stocks when they are undervalued or overlooked, anticipating that the market will eventually recognise their true value and prices will rise over time.

Features of Contra Funds:

• Invest in undervalued stocks that may be underperforming temporarily

• Follow a long-term investment approach

• Aim to capitalise on market inefficiencies

• Typically have a mix of large, mid, and small-cap stocks

This contrarian approach requires patience and a strong belief in the long-term potential of the selected stocks, as it may take time for the market to correct itself.

In today's volatile market, contra funds can serve as an appealing investment option for investors who have the ability to look beyond short-term market fluctuations and focus on the long-term.

With the global economic scenario being shaped by new geopolitical dynamics, particularly the Trump 2.0 era, investors may find themselves more cautious. The economic unpredictability may lead to significant volatility in both domestic and international markets. However, this volatility often results in the mispricing of quality stocks, which is where contrarian investors could capitalise.

[Read: The Key Factors Behind the Recent Volatility in the Indian Equity Market]

In this context, two of the top-performing contra funds that have attracted attention are the SBI Contra Fund and the Kotak India EQ Contra Fund. In the next section, we have compared these two funds, analysing their performance, strategies, and suitability for investors looking to capitalise on opportunities within the contra space amidst today's uncertain market environment.

# - SBI Contra Fund

SBI Contra Fund is managed by the SBI Mutual Fund house, one of India's oldest and most trusted asset management companies. Over the years, SBI Mutual Fund has gained a strong reputation due to its consistent performance, diversified product offerings, and strong research-driven approach.

Launched in July 1999, the fund has quickly gained popularity and currently holds an AUM of Rs 42,180.93 crores. The fund has built a reputation for its solid returns and consistent performance. It primarily invests in large-cap stocks, along with mid-cap stocks, and follows a value-investment approach that focuses on undervalued opportunities across sectors.

# - Kotak India EQ Contra Fund

Kotak India EQ Contra Fund is another popular offering under contra funds managed by Kotak Mahindra Mutual Fund house. Similar to the SBI Contra Fund, this fund follows a contrarian investment strategy, looking for opportunities in undervalued stocks with strong potential for future growth.

However, Kotak India EQ Contra Fund focuses more on identifying stocks that are not only undervalued but also have strong fundamentals and growth potential. Launched in July 2005, the fund has quickly gained popularity and currently holds an AUM of Rs 3,985.56 crores.

Investment Style and Philosophy:

SBI Contra Fund: follows a pure contrarian investment approach, meaning it invests in stocks that are currently undervalued, underperforming, or out of favor in the market. The fund identifies opportunities where businesses have strong fundamentals but are temporarily overlooked by investors. It leverages market inefficiencies and focuses on companies with turnaround potential.

Kotak India EQ Contra Fund: follows a contrarian philosophy, but with a value-oriented tilt. While it invests in undervalued stocks, it focuses more on companies with strong cash flows, sustainable growth, and stable earnings rather than just turnaround potential. Kotak India EQ Contra Fund's strategy involves identifying fundamentally strong businesses that may be mispriced due to temporary market sentiment, offering investors steady risk-adjusted returns over time.

Performance Comparison: Rolling Returns

SBI Contra Fund and Kotak India EQ Contra Fund have both delivered impressive returns, outperforming their benchmark - NIFTY 500 TRI across multiple timeframes.

However, when looking at the 3-year and 5-year CAGR, SBI Contra Fund has demonstrated superior performance, generating 28.55% and 29.79% CAGR, respectively, compared to Kotak's 24.25% and 23.71% CAGR. This suggests that while Kotak India EQ Contra Fund has shown strong recent momentum, SBI Contra Fund has maintained better long-term consistency.

Over the long term, the performance gap between the two funds narrows significantly, with SBI Contra Fund delivering a 20.03% CAGR, slightly ahead of Kotak India EQ Contra Fund's 19.84% CAGR. Both funds have outperformed the category average and the NIFTY 500 TRI benchmark across all timeframes, reinforcing their effectiveness in adopting a contrarian investment strategy.

SBI Contra Fund appears to be more resilient in long-term wealth creation, while Kotak India EQ Contra Fund has delivered stronger short-term performance. This makes both funds compelling choices, depending on an investor's investment horizon and risk appetite.

[Read: Why It Makes Sense to Take the SIP Route Now Amidst a Volatile Equity Market]

Portfolio Composition: Asset Allocation of Schemes

Kotak India EQ Contra Fund has a higher allocation to large-cap stocks at 57.60%, reflecting a relatively conservative stance within the contrarian space. At the same time, it has a notable 23.66% allocation to small-cap stocks, indicating an aggressive tilt toward emerging opportunities in undervalued and high-growth potential companies. The mid-cap allocation stands at 15.01%, offering a balanced exposure to medium-sized firms with strong growth prospects.

On the other hand, SBI Contra Fund maintains a 47.05% allocation to large-cap stocks, which is lower than Kotak's but still substantial. Its mid-cap exposure is slightly higher at 16.31%, ensuring participation in mid-sized businesses that could deliver significant upside.

However, the major difference lies in small-cap allocation, where SBI Contra Fund has only 13.36% exposure-much lower than Kotak India EQ Contra Fund. This suggests a more risk-moderated approach, focusing on established companies rather than aggressively betting on smaller, high-volatility stocks.

[Read: Indian Equity Market Has Corrected! How to Approach Mutual Funds Now]

Market Volatility: Risk Profile of Schemes

Standard Deviation, which measures the volatility of returns, is higher for Kotak India EQ Contra Fund (14.96) compared to SBI Contra Fund (13.30). This indicates that Kotak's fund has experienced more fluctuations in its returns over the last three years, making it relatively riskier than the SBI Contra Fund.

The Sharpe Ratio, which assesses risk-adjusted returns, is higher for SBI Contra Fund (0.34) versus Kotak India EQ Contra Fund (0.27). A higher Sharpe Ratio suggests that SBI Contra Fund has delivered better returns per unit of risk taken, making it a more efficient risk-reward option.

Similarly, the Sortino Ratio, which focuses on downside risk, is also higher for the SBI Contra Fund (0.71) compared to Kotak India EQ Contra Fund (0.56). This suggests that SBI Contra Fund has managed downside volatility better, making it a more stable option for investors concerned about market downturns.

Overall, Kotak India EQ Contra Fund appears to be more volatile, while SBI Contra Fund offers better risk-adjusted performance.

Top Holdings of the Schemes:

SBI Contra Fund and Kotak India EQ Contra Fund have distinct portfolio compositions that reflect their respective investment strategies. SBI Contra Fund holds a diversified mix of banking, energy, and technology stocks, with Treasury Bills (5.38%) and HDFC Bank (5.35%) as its top holdings, ensuring liquidity and stability.

On the other hand, Kotak India EQ Contra Fund has a stronger banking and IT sector focus, with ICICI Bank (5.27%), Infosys (4.43%), and HDFC Bank (3.84%) among its top holdings. It also has significant stakes in State Bank of India (3.62%), Tech Mahindra (3.22%), and Mphasis (3.00%), further reinforcing its exposure to financial and IT sectors.

Overall, while both funds hold common stocks like HDFC Bank, SBI, Tech Mahindra, and Reliance Industries, SBI Contra Fund has a higher weightage in energy and diversified businesses, whereas Kotak India EQ Contra Fund leans more toward banking and IT.

Expense Ratio of the Schemes

As you can see, the SBI Contra Fund has a significantly higher Expense Ratio for the Direct Plan as compared to the Kotak India EQ Contra Fund making it a preferable option. Do note even a small percentage point difference in the expense ratio can accumulate over time and impact your returns.

On the contrary, Kotak India EQ Contra Fund's significantly higher expense ratio (with a major difference of 0.36%) under the regular plan makes SBI Contra Fund a cost-effective option for many investors.

However, remember that while a lower Expense Ratio can potentially lead to higher returns over time, it should not be the only factor to consider when investing in sectoral funds.

Suitability of Investors to the Schemes:

SBI Contra Fund is suitable for investors with a high-risk appetite who are willing to take contrarian bets by investing in undervalued stocks that have the potential for long-term growth. Given its exposure to mid and small-cap stocks, it may experience short-term fluctuations, making it more suitable for investors with a long-term horizon of at least 5-7 years.

Investors looking to diversify beyond mainstream large-cap funds and take advantage of turnaround stories in the equity market may find this fund attractive.

Kotak India EQ Contra Fund is also designed for investors who want to benefit from a contrarian investment strategy. However, it follows a relatively blended approach, including a mix of value and growth opportunities, which can help in reducing extreme volatility. Do note it holds a higher allocation to small cap stocks, which are sensitive to price fluctuations.

It is more suited for investors who prefer moderate risk exposure while still seeking long-term capital appreciation through investments in under-researched or out-of-favour stocks. A minimum investment horizon of 5+ years is recommended to reap the full benefits of the strategy.

To conclude...

In the current market volatility, investing in contra funds can offer significant opportunities for those willing to navigate short-term market fluctuations in pursuit of long-term gains. While the market uncertainty may cause short-term disruptions, contrarian investors who remain patient and aligned with their long-term investment goals may benefit as the economic cycles unfold and market sentiments shift.

Both SBI Contra Fund and Kotak India EQ Contra Fund are solid choices within the contra space, each offering distinct approaches to managing volatility. Ultimately, investors should carefully assess their risk appetite, time horizon, and market outlook before investing in these funds amidst ongoing volatility.

Disclaimer: PersonalFN does not receive any monetary compensation from the fund house or scheme names stated in the article.

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MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.
She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.
 

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.