The Mutual Fund Show: Should You Opt For Momentum-Based Investment?

Momentum-based funds offer better returns, but investors need to be cautious of volatility, say experts.

(Source: Maxim Hopman/ Unsplash/Representational)

Passive investing has gained significant traction over the past few years. But a little-known sub-segment within the passive umbrella has outperformed benchmark indices handily both in 2023 and indeed over the past few years.

This sub-segment, called ‘smart beta’, carves out a few stocks from existing indices by introducing ‘factors’. A factor is a strategy, like momentum or value or growth. Based on some pre-set conditions, the designers of these strategies create indices, like the Nifty 200 Momentum 30 index, which espouses the Momentum factor.

How Does A Momentum Strategy Work?

The Nifty 200 Momentum 30 index is a combination of stocks that have outperformed in the last 6-12 months. The assumption is that these stocks will continue to maintain momentum and gain further. The constituents of the index are reset every six months.

"In structural bull markets or in a bull market, momentum as a strategy works. And, it's not only in India, (but) we have seen even in U.S., momentum strategy has been one of the better performing strategies going all the way back to 10 years," Chintan Haria, principal-investment strategy at ICICI Prudential AMC, told NDTV Profit.

This strategy "tends to do better", said Himanshu Kohli, co-founder of Client Associates. When looking at past data, performance momentum in 10 out of 13 years has been better than the Nifty index, he said.

However, these are largely volatile investments, said Kohli. "Imagine if you start buying a particular stock once it crosses a 50-day moving average or a 200-day moving average, and all of a sudden, the stock starts coming down. Unless the 50 or 200-day moving average is lower, they will not sell it. So, it increases the volatility, especially in a downward market or in a side-based market," he said.

"First and the biggest risk is you are heavily relying on the trend in momentum strategy," said Anant Ladha, founder of InvestAajForKal. In the past few years, value funds have been outperforming the momentum funds; but when looking at the 15-year data, momentum is outperforming value and normal index by a large margin, he said.

Those looking to invest in these strategies could look at mutual funds that offer them in the form of index funds or exchange traded funds. The two mutual fund houses offering the Nifty 200 Momentum 30 Index are ICICI Prudential Mutual Fund and UTI Mutual Fund.

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