The Signal : Mutual Fund Guide to Momentum Investing

Nitin Chaudhary
22 Apr 3 minutes

There has been a constant debate between Value and Growth investing in every market situation. The fundamental difference between both these strategies is the mindset of an investor. While growth investing focuses on brighter business prospects, higher revenue growth leads to higher profitability resulting in a gain in stock prices.

On the other hand, value investors look for assets that may not lead to immediate profitability. Value unlocking may happen in various ways such as corporate actions which include bonus issues, right issues, mergers, and demergers.

Along with growth and value, there is another popular strategy that is Momentum investing which is also grabbing investors’ attention.

Keep reading if you are interested to understand more about it.

Momentum investing broadly refers to capturing the ‘trend in movements of stock prices and going along with the general opinion of the market with an underlying belief that prices are a true reflection of investors’ reaction to the publicly available knowledge. At its core, the momentum-based portfolio is constructed believing that, investments that have performed relatively well, continue to perform relatively well and those that have performed relatively poorly, continue to perform relatively poorly.

Momentum investing however can be linked to the growth style of investing. Globally, factor investing as a concept and in particular momentum as a factor, has caught investor attention over the last decade

What should investors do?

Before jumping on to the verdict we need first look at existing ways to invest in a momentum strategy and secondly, is there a benchmark to gauge the performance of this strategy? There are both!

Nifty200 Momentum 30 Index gives you a blended exposure to 30 high momentum stocks across the large and midcap universe. Currently, the Index has approximately 90% exposure to large-cap companies. However, investors should not use Nifty200 Momentum 30 index as a substitute for large-cap allocation.

Here is an example of a few top holdings of the Nifty 200 Momentum 30 Index and their sector movement.

The above chart indicates that ferrous metals sector allocation became 0% after Nov 2021 from 12.3%. similarly, within Software the allocation doubled after Nov 2021. The idea here is that the index seeks to capture those sectors that exhibit higher momentum.

If one wants to ride the advantage of a positive upswing over the long term, Nifty200 momentum index funds can be a good bet. The catch here is that the index might experience steeper and prolonged drawdowns. Here is how Momentum strategy tends to do across different cycles:

Momentum and Value tend to outperform in periods of business expansion also Momentum strategy provides better downside resilience as compared to Nifty 200 TRI.

If you are interested to understand the mutual funds that follow this strategy then write to us at ask@fisdom.com.

Have a great weekend.

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