Explained: Momentum Index Funds Investment Strategy:In recent times, the trend towards momentum investing has increased among mutual fund investors. The strategy of momentum investing means investing in companies whose stocks have performed well in recent times. Different momentum funds track different indices. Therefore their performance and risk profile can also be quite different. This is why to reap the full benefits of a momentum investing strategy, it is very important to choose the right momentum index and then invest in the right mutual fund scheme that tracks it. Next we will learn how to choose the right scheme among the crowd of momentum index funds. But before that let us know what is the meaning of Momentum Funds and their specialties.
What are momentum funds?
Momentum funds focus on investing in stocks that have been market winners in recent times. These funds choose those stocks which are growing due to their consistently good performance. Passive momentum funds track a particular momentum index for this. In this way, the momentum strategy of investing in mutual funds actually depends on the movement of the market, and this strategy can give big returns in a bullish market, while its effect can be reverse in times of decline.
Also read: Income Tax: Today is the last chance to save Rs 1.5 lakh, if you miss it, there will be a big loss.
Momentum indexes and funds based on them
Every momentum index fund tracks some momentum based index. Momentum based indexes are such indexes in which selected out-performers i.e. better performing stocks are included from among all the stocks included in a broad index. The list of such momentum-based indices includes indices like Nifty 200 Momentum 30 Index, Nifty Midcap 150 Momentum 50 Index, and Nifty 500 Momentum 50 Index, based on which many momentum index funds are available for investment.
Also read: Gold Buying: Do you intend to buy gold in the festive season? Apart from jewelery shop, you can also shop like this
Some Important Momentum Indices
– Nifty200 Momentum 30 Index:This index is prepared by selecting 30 best performing stocks from the 200 largest companies.
– Nifty Midcap150 Momentum 50 Index:This index is based on mid-cap stocks and includes 50 momentum winner stocks out of 150 midcap stocks.
– Nifty500 Momentum 50 Index:This index is formed by combining the top 50 best performing stocks from all three types of stocks, large cap, mid cap and small-cap.
Additionally, there are some multi-factor momentum indices that some funds track. For example, Nifty Smallcap 250 Momentum Quality 100 Index and Nifty MidSmallcap400 Momentum Quality 100 Index. These funds select small and midcap stocks on the basis of momentum and quality.
How to choose the right momentum fund?
-
Based on risk profile:Momentum investing can be risky because it is based on the current trends of stocks. In such a situation, you should choose the right fund according to your risk appetite. If you can take more risk, then mid-cap or small-cap momentum funds may be good for you. At the same time, if you do not want to take much risk, then large-cap momentum fund or multi-factor strategy can be a better option.
-
Large-cap vs mid-cap:Momentum investing in large-cap stocks is comparatively less risky because these companies are larger and more stable. Whereas the risk in mid-cap and small-cap stocks is higher, but the returns can also be higher. For example, Nifty Midcap150 Momentum 50 Index has given the best returns in the last 5 years.
-
Multi-Factor Strategy:Some momentum index funds take into account factors like momentum as well as quality. Such funds have low risk and can perform well in different market conditions. For example, Nifty MidSmallcap400 Momentum Quality 100 Index and Nifty Smallcap250 Momentum Quality 100 Index have shown good stability.
Also read: HDFC Mutual Fund Scheme: Money doubles in 3 years and triples in 5 years, huge profits even on SIP, what is the reason for success?
Benefits and Risks of Momentum Funds
Momentum funds can grow rapidly in bullish markets and give good returns. They have flexibility because they constantly update their selection of market winning stocks. But at the same time, there is also a risk of huge losses in Momentum Funds when it falls. Especially if the momentum fund focuses on mid-cap or small-cap stocks. Apart from this, many times the stock selection of such funds does not focus that much on fundamentals or valuation, due to which the risk increases.
Also read: Mutual Fund Megastar: Scheme with investment of Rs 81,000 crore! Why did this equity fund become the favorite of investors? How is the return record?
What is the best option for you?
If you want to adopt a momentum strategy with less risk, then you can consider investing in funds based on Nifty200 Momentum 30 Index. These funds can be said to be comparatively less risky because they track an index based on large-cap stocks. But if you are looking for higher returns and can take more risk for it, then you can consider Nifty Midcap150 Momentum 50 Index or Nifty500 Momentum 50 Index. These funds give you an opportunity to invest in winning stocks from different segments of the market. But whatever be the momentum fund, there is always market risk associated with it due to investment in equity. Therefore, before deciding to invest in these, think carefully about your risk appetite and investment objectives. Overall, it is a high risk investment strategy, which can give big returns if implemented properly. It would be better if you consult your financial advisor before taking any decision in this regard and invest wisely.
(Disclaimer: The purpose of this article is only to provide information and not to advise investment in any fund. Investments made in equity mutual funds are directly affected by the ups and downs of the stock market. Any investment decision should be taken by your investment advisor. Do it only after taking advice from.)
