Value Funds vs Contra Funds in India 2026: Two Bargain-Hunting Strategies, and What SEBI's New Rules Changed

By Nitish Bharadwaj · Published Sep 23, 2026 · 6 min

Value funds buy stocks trading below their estimated worth on measures like price-to-earnings and price-to-book; contra funds buy sectors and stocks the market is currently avoiding, betting sentiment will turn. Both are equity schemes taxed as equity. SEBI's February 26, 2026 circular raised their minimum equity allocation from 65% to 80% and, for the first time, allowed a fund house to offer both categories, provided the two portfolios overlap by no more than 50%. Both styles can lag for years, so they suit patient investors as a satellite holding, not a core one.

Value funds and contra funds sound like two versions of the same idea — buy what's cheap, wait for the market to notice. For years that's roughly how they behaved, and SEBI's old rules even forced each fund house to pick just one of the two. The February 2026 categorisation overhaul changed that. A fund house can now run both, but only if the portfolios genuinely differ. That makes the question worth answering properly: what separates the two strategies, and does either belong in your portfolio?

How Each Strategy Picks Stocks

A value fund looks at individual companies. The fund manager estimates what a business is worth — using earnings, book value, cash flows and dividends — and buys when the share price trades meaningfully below that estimate. Low price-to-earnings and price-to-book ratios are the typical starting screen. The bet is that the price eventually catches up with the underlying value.

A contra fund starts with sentiment rather than valuation. It buys sectors and stocks the market has turned against — an industry hit by a regulatory scare, a cycle at its bottom, a company everyone has written off — on the view that the pessimism is overdone. Contra stocks are often cheap too, which is why the two portfolios overlap, but a contra manager can also buy a stock that isn't statistically cheap if the crowd is clearly on the wrong side of it.

What SEBI Changed in February 2026

SEBI's circular on categorisation and rationalisation of mutual fund schemes, issued on February 26, 2026, made three changes that matter here. First, the minimum equity allocation for both value and contra funds rose from 65% to 80%, so neither can drift heavily into debt or cash while still carrying an equity label. Second, a fund house may now offer both a value fund and a contra fund, which the 2017 framework didn't allow. Third, if it does run both, the portfolio overlap between the two cannot exceed 50%.

The overlap cap is the important part for investors. It stops fund houses from launching a near-copy of an existing scheme under a new name to gather more assets. Overlap is measured regularly and disclosed, and existing schemes have been given a transition period to comply. Our explainer on how SEBI's 2026 mutual fund overhaul affects your SIP covers the rest of the circular.

The Risk Nobody Mentions: Long Dry Spells

Both strategies are built on waiting for the market to change its mind, and markets can take years to do that. When a handful of popular growth stocks drive an index higher, value and contra funds often lag badly — and then catch up in a short burst when the cycle turns towards neglected sectors like banks, metals, energy or PSUs. An investor who exits during the lagging phase locks in the worst of both worlds.

This is also why comparing funds on one-year or even three-year returns is misleading here. Look at rolling returns across a full market cycle, the fund manager's tenure, and whether the portfolio actually looks different from a plain large-cap or flexi-cap fund. Many value and contra funds end up holding a large chunk of the same frontline stocks as a Nifty 50 index fund.

Who Should Invest — and How Much

• Investors who already have a diversified core in an index, large-cap or flexi-cap fund and want a style that behaves differently from it.
• People with a horizon of at least seven years who can hold through a stretch of underperformance without switching out.
• SIP investors, in particular — regular instalments buy more units during exactly the lagging phases these funds are prone to.

Pick one, not both. Even under the 50% overlap cap, a value fund and a contra fund share a temperament, and holding two of them rarely diversifies as much as it seems. A 10–20% satellite allocation is sensible for most portfolios. Before adding either, run it through a mutual fund portfolio overlap check against what you already own, and see our category-wise guide to the best mutual funds for 2026 for how value strategies fit alongside the other equity categories.