February 8, 2023

Momentum investing has its followers, a lot of whom are fairly vocal on social media. However the floor actuality is that the thought nonetheless has a really small following in comparison with the general investing panorama in India.

Nonetheless, their recognition is rising and even AMCs are bitten by the momentum bug.

Until final yr, solely UTI had a momentum providing. Now, Aditya Birla Sunlife, Motilal Oswal, IDFC, and ICICI have all provide you with their momentum merchandise. Unsurprisingly, all are passive funds and based mostly on Nifty200 Momentum 30 index.

On August 19, IDFC Asset Administration launched its momentum fund referred to as the IDFC Nifty200 Momentum 30 index fund. Its new fund provide (NFO) ends on August 26.

Fund homes have their causes for launching schemes — elevating funds, being current in a brand new area, and so forth. However do momentum funds make sense for the common retail investor?

What’s momentum investing?

In contrast to the prevailing buy-low-sell-high canon, momentum investing takes the alternative method. It’s based mostly on the premise that shares doing nicely have momentum and therefore, will proceed to do nicely within the close to time period. So, momentum investing tries to journey this wave (or momentum) of shares which might be doing nicely after which, leap on to the subsequent wave earlier than the primary one slows down.

This sounds good and to many, just like the holy grail of investing.

However does it work?

Momentum has caught the eye of buyers lately. Many momentum methods have generated returns increased than broader indices. And at occasions, the outperformance has been important.

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If we take a look at the Nifty 200 Momentum 30 Index, on which all of the Indian momentum funds are based mostly, then the index has outperformed the Nifty 200 since its inception.

Although a bit dated (and there may be nonetheless no replace on their web site), that is what NSE needed to say (in 2020) concerning the index’s outperformance: “The Nifty200 Momentum 30 index has constantly outperformed the Nifty 200 index on a every day rolling return foundation over lengthy and quick horizons.’’

Does Momentum Helps You To Outperform R

However earlier than you settle for this as the brand new greatest technique to observe, please do not forget that most of that is back-tested knowledge. And back-testing and actuality may be completely different. So, what now we have is extra in idea than in follow.

In reality, the oldest mutual fund within the area is only one yr outdated.

And that’s one thing that ought to be remembered earlier than betting large on this, and on any technique.

Look beneath the hood

Allow us to look beneath the hood of the momentum index for a bit. The Nifty 200 momentum 30 Index chooses solely 30 firms from the highest 200 listed on the NSE (a mixture of 100 large-cap and 100 mid-cap shares).

Thus, the index goals for publicity to high-momentum shares throughout massive and mid-cap shares from the highest 200 firms. From these, it picks 30 with the best normalised momentum scores.

This train is repeated half yearly, and therefore, the index goes by a six-monthly rebalancing and churn.

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A small sidenote right here: a little bit of quantity crunching suggests {that a} rebalancing frequency of six months is just too lengthy for momentum methods. A weekly or month-to-month frequency can be extra appropriate. However to be honest, that may considerably improve the bills and therefore, will not be possible.

Now, provided that the index is mostly a mixture of massive and mid cap shares, that are churned semi-annually, it won’t be unsuitable to say that the momentum index can usually provide you with fairly a unique portfolio in comparison with these within the common Nifty 50, Subsequent 50 or Nifty 200 indices.

This could add some tactical diversification to an investor’s present portfolio comprising widespread index funds, large-cap funds, flexi-cap funds, and so forth.

Additionally given the structural nature and rebalancing, this fund may be fairly unstable within the quick time period. Due to this fact, it’s best for buyers keen to simply accept excessive volatility on the draw back (and never simply on the journey up). Additionally, it’s extra appropriate for these with a long-term horizon of 5 years or extra.

This shouldn’t be an alternative choice to your pure large-cap allocation. You shouldn’t attempt to substitute your lively large-cap funds, index funds, flexi-cap funds with these new momentum funds.

At greatest, it might be mixed with different common classes.

How a lot to Make investments?

A number of factors that will help you resolve.

• The thought of driving the momentum in direction of increased income is certainly promising, however these funds are nonetheless new and unproven.

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• If you’re a conservative saver with a small fairness allocation or new to fairness, give this class a miss. Hold your investments restricted to large-caps, index funds, and flexi-cap funds.

• When you have some urge for food for volatility and determine as a sufficiently aggressive investor, then you’ll be able to mix momentum funds with different classes like lively or passive large-cap funds, flexi-caps, mid-caps, and so forth. It will undoubtedly provide you with some fashion and technique diversification. However restrict your total publicity in momentum funds to 10-20 % most.

• Publicity beneath 5 % will anyhow not transfer the needle a lot. So, regardless that momentum funds are greatest as a satellite tv for pc fairness portfolio, there nonetheless must be significant publicity. In any other case, it simply provides to portfolio litter.