Which momentum investing strategy works best for you?

In recent years, equity investors They have been bitten by the momentum investing virus. The search for recent winners has been very rewarding. Unsurprisingly, asset management companies have entered the scene and launched a number of strategies aimed at those seeking momentum. Investors can now choose from a tray of impulse fundseach of which offers a different flavor. However, not all momentum strategy will adapt to your needs.

Momentum-based funds currently enjoy a 40% share of assets parked in factor strategies in the country. Several new momentum indices have been launched in recent years. This is what a momentum seeker can bet on right now. In the passive fund basket, investors can choose between funds that mimic the Nifty200 Momentum 30 index, Nifty Midcap150 Momentum 50 Index, as well as Nifty500 Momentum 50 Index. Basically, these allow investors to take advantage of the winners in different playing fields. The Nifty200 Momentum 30 index, which is the oldest of them all, offers a bet on 30 winning stocks from the 200 largest listed companies. The Nifty Midcap150 Momentum 50 Index provides a specific momentum play in the midcap segment. Meanwhile, the Nifty500 Momentum 50 index selects the best performing companies from a broader universe of 500 stocks spanning large, medium and mid-sized companies. small cap market segments.

There are also a couple of multi-factor strategies that combine momentum and quality, targeting different market segments. Mirae Asset AMC manages funds based on the Nifty Smallcap250 Momentum Quality 100 Index as well as the Nifty MidSmallcap400 Momentum Quality 100 Index. As the names suggest, these funds look at the small cap and mid/small cap segments, respectively, in Look for stocks with the best momentum and quality characteristics.

With so many offerings, choosing a momentum fund is not an easy task. These are all smart beta strategies, running a factor tilt in addition to a traditional base index. Most have demonstrated their ability to outperform the base index by taking advantage of the momentum factor. To be sure, momentum works the same regardless of the market segment you pursue. However, investors should choose wisely, as momentum can lead to different outcomes depending on the playing field. Pratik Oswal, business head, passive funds, Motilal Oswal Asset Management Company, says, “These offerings are aimed at investors with different risk profiles, even if they follow the same momentum investment strategy. The key difference is the universe in which they operate.”

Different strategies can help you take advantage of market winners

Momentum is a fairly aggressive strategy as it does not take into account business fundamentals, valuations or margin of safety. It can generate huge returns in an uptrend market, but it can also take a bigger hit when the market falls. The risk profile may increase further when momentum develops within specific market segments. For example, seeking momentum in an environment dominated by large-cap companies may have substantially different results than executing the strategy in a mid- or small-cap environment. Rushabh Desai, founder of Rupee at Rushabh Investment Services, observes: “In momentum-based funds, drawdowns can be more severe than others if they are heavy on mid- and small-cap companies. Historically, bearish periods can last longer in mid- and small-cap companies. Combining both may not work well in certain phases of the market.” Oswal agrees: “Momentum is a high-risk strategy anyway and running it in the small or even mid-cap space raises the risk profile even further.” However, the Nifty Midcap150 Momentum 50 Index is a powerful strategy thanks to its ability to deliver huge returns with volatility similar to that of its base index. It has outperformed all momentum indices over the past five years. For those who want to ride the momentum in a relatively safer and more hygienic environment, the Nifty200 Momentum 30 Index is a good option. However, it can also limit the potential return for the investor. Momentum can be safely achieved when combined with factors such as quality or low volatility, particularly in high-risk segments such as mid- and small-caps. “A multi-factor strategy that combines momentum with, say, quality, can be a good bet, as it combines factors that tend to work in opposite market conditions,” says Oswal. Both Nifty MidSmallcap400 Momentum Quality 100 and Nifty Smallcap250 Momentum Quality 100 have delivered healthy results.

For those looking for higher rewards without getting trapped in a specific market segment, the Nifty500 Momentum 50 Index could be the ideal bet. “This index can be a game-changer in the area of ​​flexible capitalization for significant wealth creation,” says Desai. While looking for winners across market capitalization segments, you retain the agility to benefit from different better-performing market sectors. For example, the index had a 65% allocation to large caps and another 30% to midcaps in June 2024. In contrast, it had a 35% exposure to both midcaps and small cap in December 2023. This agility is missing from almost all actively managed soft cap funds, which adopt a strong bias towards large cap.

Investors can also choose from momentum strategies in the actively managed space. Quant Momentum and Samco Active Momentum run their own versions of the “buy high, sell high” investment philosophy, but both funds have a higher expense ratio than their index fund counterparts.