Buy high, sell higher: Does momentum strategy work for Indian investors?
Momentum strategy follows a ‘buy high and sell higher’ approach of investing and exhibits high volatility in the short term. Investors with a high risk profile and long-term view can allocate 10-15 percent of their portfolio to momentum strategy. About 12 mutual fund schemes offer this play
Momentum investing is ruling the performance charts. Among large-cap equity funds, all index funds tracking Nifty200 Momentum 30 Index Fund have been one of the top performers based on one-year performance. There are 12 schemes focusing on momentum indices in the Indian mutual fund industry which includes Edelweiss Nifty Midcap 150 Momentum 50 Index Fund, a recent addition. Also, Samco Mutual Fund has launched Samco Active Momentum Fund, which is an actively managed equity fund. Buying stocks that are trending upwards can be a sure way of making money for a few. Among various factors that lead to outperformance in broader markets – quality, value, growth, volatility and momentum, and of late momentum strategies are catching up with investors. The largest and oldest scheme – UTI Nifty200 Momentum 30 Index Fund manages assets worth Rs 2,273 crore. Against this backdrop, let’s see if investing in passively managed smart beta strategies based on momentum pays the investors.
2/9
Sharwan Goyal, Fund Manager and Head – Passive, Arbitrage and Quant Strategies at UTI AMC, points out that momentum investing is a strategy that aims to capitalise on the continuance of an existing market trend. “It is a strategy that involves buying securities which are exhibiting strong price momentum with a view that momentum would persist in future. It is effectively a “buy high and sell higher” approach of investing,” he adds. A look at the past 15 years' data underlines the trend that over a five-year period rolling returns from momentum indices are more than those given by the Nifty 200 and Nifty Midcap 150 indices.
3/9
Momentum investing is considered a risky strategy. Contrary to popular perception, momentum indices have shown slightly better performance than parent indices in rising markets and more resilience in falling markets.
Though momentum investing can be rewarding, it might not outperform all factors throughout the year. Goyal underlined the fact that the outcome of a momentum strategy-based portfolio may witness significant ups and downs. “Therefore, to provide an optimal balance in the overall portfolio one should actually consider combining other factors like Low Volatility to generate relative stable returns.
How much can momentum indices fall? Momentum-based indices can be unsettling for many investors. The maximum drawdown seen by the indices is 39 percent in the last 10 years. “Investors should consider the potential risks associated with momentum strategies, such as increased turnover, transaction costs, and the potential for momentum crashes during periods of market stress,” says Sailesh Jain, Fund Manager, Tata Mutual Fund. Investors should allocate up to 10-15 percent of their portfolio to momentum strategy, he adds.
Since these indices include high momentum stocks, they tend to exhibit higher standard deviation than their respective mother indices and of course Nifty 50 TRI. Standard deviation measures the dispersion of a dataset relative to its mean and is often used as a measure to calculate the relative riskiness of an asset.
7/9
The top 5 stocks in Nifty 200 Momentum 30 index funds as of June 30, 2023, were Cholamandalam Investment and Finance Co, Bajaj Auto, Godrej Consumer Products, Axis Bank and TVS Motor Company. The top 3 sectors were Finance, Banks and Automobiles.
The top 5 stocks in the portfolio of Nifty Midcap150 Momentum 50 index funds as of June 30, 2023, were TVS Motor Company, The Indian Hotels Company, CG Power and Industrial Solutions, Max Healthcare Institute and Cummins India. The top 3 sectors were Industrial Products, Finance and Auto Components.
