Add spice to your portfolio with momentum investing!
5paisa Research Team
Last Updated: 10th December 2022 - 07:28 pm
Momentum investing does feel tempting, but can funds following momentum strategy replace other equity funds in portfolio? Let’s find out.
Momentum investing is an investment strategy where investors buy stocks while they are rising and shrug them when they arrive at euphoria. Here the intention is to take advantage of the volatility by seeking buying opportunities in short-term uptrends and when the stocks start losing momentum, sell them. Post selling, the investor either invests in cash while waiting for the next opportunity or just rebalance their portfolio to catch the stocks that are likely to witness short-term uptrend and repeat the process.
The risk with momentum strategy is that investors might move into a position too early or might exit the stock too late and might miss out on key technical trends. That being said, is it wise to invest in mutual funds following momentum strategy? We shall find out the same in this article.
The strategy became popular during the pandemic as the markets were reaching new highs and so did equity mutual funds. Moreover, as this strategy prefers investing in stocks riding on momentum, it stands to benefit from market volatility. In order to understand it better let us compare the Nifty 200 Momentum 30 index with that of Nifty 50, Nifty 200, Nifty 500, Nifty Midcap 150 and Nifty Smallcap 250 Total Returns Index (TRI). The study is for the period starting from April 2005 till date.
|
Median Rolling Returns (%) |
1-Year |
3-Year |
5-Year |
|
Nifty 200 Momentum 30 |
20.43% |
17.67% |
19.48% |
|
Nifty 50 |
14.05% |
10.95% |
12.14% |
|
Nifty 200 |
13.34% |
11.67% |
12.19% |
|
Nifty Midcap 150 |
14.94% |
13.04% |
14.63% |
|
Nifty Smallcap 250 |
11.67% |
9.99% |
12.48% |
As seen in the above table, Nifty 200 Momentum 30 TRI beats all the other indices in all the rolling returns period. We have taken the median rolling returns for one-year, three-year and five-year period in order to compare each other. Having said that, returns is just one part of the story. In the other half we also need to look at the risk that it undertakes to generate such superior returns.
|
Maximum Drawdown (%) |
|
|
Nifty 200 Momentum 30 |
-67.69 |
|
Nifty 50 |
-59.50 |
|
Nifty 200 |
-63.67 |
|
Nifty Midcap 150 |
-72.89 |
|
Nifty Smallcap 250 |
-75.56 |
We have measured the maximum drawdown of the various indices to understand the risk part of the story. As you can see, it is quite risky and at times have deep cuts. When the markets are surging it will perform well, but during the markets running down, momentum funds tend to bleed. Having said that, in the falling market it makes sense to accumulate units of momentum funds as these funds would help provide boost to your portfolio when the markets turnaround.
Below are the funds that follow momentum strategy.
|
Funds |
Fund Manager |
|
Motilal Oswal Nifty 200 Momentum 30 ETF |
Swapnil P Mayekar |
|
Motilal Oswal Nifty 200 Momentum 30 Index Fund |
Swapnil P Mayekar |
|
UTI Nifty200 Momentum 30 Index Fund |
Sharwan Kumar Goyal |
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