ICICI Prudential CIO sees contrarian plays in mid, smallcaps as underperformers emerge

When Indian stock markets stumbled hard in September, losing ground across nearly every index, a particular investing strategy started to look less like a curiosity and more like a shelter. Contra funds—vehicles built explicitly to buy what everyone else is selling—held up better than the market itself. Over the past year, they lost 6.62 percent on average. The Nifty 50 fell 11.24 percent. The gap matters, and it's drawing money and attention.

Sankaran Naren, the chief investment officer at ICICI Prudential Asset Management, sees the moment as real. "There is a significant differentiation in valuations and investor sentiment," he said recently. The idea behind contrarian investing, as he frames it, is straightforward: identify stocks and entire sectors that have lagged the market over three to five years—sometimes just one year—then research that universe carefully to find actual investment ideas. It sounds simple. It isn't.

The strategy has a track record worth noting. Over three years, contra funds have delivered 10.33 percent annually on average, well ahead of the Nifty 50's 4.18 percent return. The Nifty 500 TRI, a broader measure, returned 8.73 percent. These numbers matter because they suggest that buying what others have abandoned, if done with discipline, can work. But the category is getting crowded fast. SBI Contra Fund, the largest, holds 45,068 crore rupees. Invesco India Contra follows at 20,644 crore. Bandhan and Motilal Oswal have recently launched their own contra funds. ICICI Prudential's new offering was still open for subscriptions as of mid-October 2026.

Naren sees opportunity specifically in mid and smallcap stocks right now. In September alone, the Nifty Midcap 150 fell 7.09 percent—harder than the Nifty 50's 6.06 percent drop. Smallcaps held up better, the Nifty Smallcap 250 down just 3.12 percent. "We see contra opportunities in the mid and smallcap space, as there are many sectors where the underperformance has been pronounced," Naren said. "But the key principle is that we will only buy underperformers." The distinction matters. Contrarian does not mean cheap. It means out of favor. A common mistake is treating the two as identical.

Naren pushes back on another misconception: that contrarian investing is a fixed category. "Contrarian investing can include value, growth or quality stocks at different points in time," he explained. Quality stocks have underperformed for six years and have therefore become contrarian. In 2020, quality would not have been a contrarian play at all. The label moves with the market cycle. What matters is the discipline of buying what has genuinely lagged, not what merely looks cheap on a spreadsheet.

The strategy's largest demand is patience. A stock that has underperformed for years can keep underperforming before the market recognizes a fundamental shift or a change in sentiment. Naren is direct about this: "Investors should be mindful that contrarian investing requires patience, because the market may take time to recognise a change in fundamentals or sentiment." This is not a strategy for people checking their portfolios monthly or quarterly. It requires a minimum five-year horizon. Contra bets can take years to play out, and returns can trail the market in the meantime.

For investors considering this approach, the practical advice is clear. Use a contra fund as a satellite position, not the core of a portfolio. A flexi-cap or index fund can anchor the holdings, with a contra fund adding diversification. Check for overlap with other holdings—if you already own a value fund, the two portfolios may hold many of the same stocks, defeating the purpose. In a market where sentiment has turned sharply negative, contrarian funds offer a structured way to buy what others are avoiding. But they demand something most investors struggle to give: time.