Jun 19, 2024 76 min read

SBI Contra Fund: Is this Best Mutual Fund for 2024?

I heard you have a great sense of investing, so allow me to introduce you to a fund that might catch your interest. Let's talk about Contra Funds, but why is this particular fund gaining so much attention? And why do so many investors prefer it over other mutual funds?

Here the answer starts: Contra funds are equity mutual funds that invest in out of favor stocks with strong recovery potential. Unlike value funds, they focus on stocks expected to underperform but believed to deliver strong returns. By investing in undervalued assets across all market caps and using diverse strategies, they create a well-rounded portfolio. The goal is to buy discounted stocks and hold them until their true value is recognized, aiming for better long-term returns by investing early in overlooked sectors.

The Advantages of Contra Strategy in Volatile Markets?

Contra investing focuses on undervalued stocks in sectors like IT, pharma, energy, and metals, despite recent ups and downs. After the COVID-19 crash, the Nifty 50 TRI nearly doubled, leading to higher valuations. Market uncertainty from events like the Israel-Hamas conflict and possible interest rate hikes has made stock prices unpredictable. However, India's long-term economic outlook remains strong as the fastest-growing major economy according to the IMF.

Contra funds attract long-term investors looking for stability by focusing on discounted, overlooked stocks. These investments are less affected by short-term market changes and could potentially bring in substantial returns over time as their value is realized.

Now that you have an understanding of what contra funds are, let's take a deep dive into the SBI Contra Fund.

Overview of SBI Contra Fund

The SBI Contra Fund has proven itself as a top-performing choice, consistently delivering impressive returns in recent years. Its Assets Under Management (AUM) increased from around Rs.1,300 crores in August 2020 to a significant Rs. 30,520 crores by May 2024. An extraordinary growth of 2300%. Investors are attracted by its impressive track record and skilled management. Since its inception in July 1999, an initial investment of Rs.10,000 would have grown to Rs. 1.44 lakhs as of May 2024, representing a compounded annual growth rate (CAGR) of 17.68%. Under the leadership of Dinesh Balachandran, the fund has established its position as a top performer in its category.

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What Makes the Investment Strategy of SBI Contra Fund Unique?

The SBI Contra Fund employs a targeted investment approach, seeking out undervalued stocks and sectors that have been overlooked by the market despite their strong long-term potential. The fund searches for opportunities across a variety of market sizes and industries, specifically targeting stocks that are trading below their true worth due to temporary setbacks. By employing both 'top-down' and 'bottom-up' approaches, the fund carefully selects stocks, giving priority to companies with robust fundamental strengths. The fund's strategy emphasizes patience and meticulous research to capitalize on potential future recoveries and uncover hidden value in its investments.

To predict if the SBI Contra Fund will perform well in the future, let's first review its Rolling Returns:

Rolling Returns Analysis

Since its inception in January 2013, the SBI Contra Fund has consistently outperformed its benchmark, the Nifty 50 TRI, with nearly 15% annualized returns over any 3-year period compared to the benchmark's 13.96%. Over 5 years, the fund has maintained a higher consistency in returns, with 74% of the time outperforming its benchmark. This underscores the fund's ability to generate superior returns over the long term, despite occasional lower consistency in shorter timeframes.

 Rolling Returns Analysis

How Has the SBI Contra Fund Outperformed Its Peers Recently?

 SBI Contra Fund Outperformed Its Peers Recently

The SBI Contra Fund has delivered impressive returns of 20.36% over the past six months and 47.87% over the last year. In contrast, the NIFTY 50 TRI benchmark posted returns of 11.51% and 26.64% over the same periods, underscoring the fund's superior performance. This strong performance demonstrates that the fund has consistently outperformed its benchmark, reflecting its promising potential for investors seeking robust returns.

Portfolio Allocation: The Diverse Approach of the SBI Contra Fund

The SBI Contra Fund maintains a well-diversified portfolio across various sectors to minimize dependency on any single industry. It spreads its investments across the financials, energy, healthcare, metal mining, and auto sectors.

Large-cap stocks account for approximately 58.87% of the portfolio, while mid-cap stocks make up an additional 34%. It serves several strategic benefits, large-cap stocks, being more established and stable, provide a foundation of reliability and liquidity to the portfolio. They typically offer steady returns and lower risk compared to smaller companies. By increasing exposure to mid-cap stocks, the fund aims to capture these growth opportunities that may outperform broader market indices.

 Portfolio Allocation

This fund follows a contrarian investment strategy, meaning it focuses on sectors that have recently shown poor performance but are expected to recover and grow in value. Specifically, it sees potential in sectors like energy and metal & mining for future appreciation.

The fund's ability to adjust its holdings and its balanced approach to both large and mid-cap stocks are key strengths. Its success largely depends on the effectiveness of its contrarian strategy and the performance of sectors like energy and metal & mining moving forward. These factors position the SBI Contra Fund favourably for potential future returns.

SBI Contra Fund Art of Selecting Quality Stocks

Dinesh Balachandran, the fund manager of SBI Contra Fund, employs a contrarian investment strategy, targeting companies that are currently out of favor but hold potential for future growth. As of May 31, 2024, the fund's portfolio is well-diversified, comprising 94 domestic stocks, each with an allocation of less than 5%.

Balachandran identifies these stocks by focusing on companies with poor earnings, low stock prices, and challenging growth prospects. For instance, during downturns in sectors such as healthcare and power, the fund invested early, anticipating a subsequent recovery that proved profitable.

Among the fund's top 5 holdings are Kotak Mahindra Bank, Reliance Industries, ICICI Bank, Infosys, and HDFC Bank. When evaluating stock selections, the fund prioritizes criteria like sales growth, profitability, cash flow, and price-to-earnings ratio (PE). On average, portfolio companies are achieving 14% sales growth, 23.55% profitability, a 27.56% increase in cash flow, and maintain a low PE ratio of 15.45, indicating favorable valuation.

Fundamental RatiosValue
Sales Growth 13.77%
Earning Growth 23.55%
Cash Flow Growth 27.56%
PE- Valuation 15.45%

Overall, the SBI Contra Fund stands out for its focus on high-quality, rapidly growing companies, making it a top choice for investors seeking long-term growth opportunities.

Who Should Invest in SBI Contra Fund?

Investors looking for a contra-style investment approach may find SBI Contra Fund an appealing choice due to its potential for lower risks during market downturns and superior long-term returns. The fund has a proven track record of delivering profits to investors over extended periods. Managed by seasoned fund manager Mr. Dinesh Balachandran for more than 20 years, including over 6 years overseeing this specific fund, it adheres to a disciplined investment strategy that emphasizes consistency and performance.

SBI Contra Fund is particularly suitable for investors seeking diversification across different market capitalizations. It is recommended for those with a time horizon of 5-7 years, aiming to benefit from the fund's ability to identify undervalued opportunities and capitalize on their potential for growth. When discussing long-term investments, it's advisable to invest through SIP for disciplined investing and higher profits. When discussing long-term investments, it's advisable to invest through SIP for disciplined investing and higher profits.

Explore More blogs on SBI Mutual Funds

1. SBI Small Cap Fund : Is It a Safe Investment Choice in 2024?

2. SBI Automotive Opportunity Fund: Presenting New Investing Era of Automobiles

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