Momentum funds are a type of mutual fund that invests in stocks that have shown strong performance in the recent past based on certain criteria. The idea behind momentum investing is to ride the wave of positive market sentiment and capture the returns from the upward movement of stock prices. Momentum funds are often considered a high-risk, high-reward strategy, as they can generate superior returns in a bull market but also suffer heavy losses in a bear market.
One of the challenges of momentum investing is identifying the right stocks that have the potential to sustain their momentum and avoiding the ones that are likely to reverse their direction. To do this, momentum funds use various indicators and metrics to measure the strength and persistence of the stock’s performance. One such metric is the Normalized Momentum Score (NMS), which is calculated by dividing the stock return over a certain period by the standard deviation of the return. A higher NMS indicates more consistent and stable momentum.
In India, there are two indices that track the performance of momentum stocks: the Nifty 200 Momentum 30 Index and the Nifty Midcap 150 Momentum 50 Index. These indices are composed of 30 and 50 stocks, respectively, selected from the Nifty 200 and Nifty Midcap 150 indices based on their NMS over the past six and 12 months. The indices are rebalanced semi-annually and have a cap of 5% on the weight of each stock.
How are momentum funds affected by market volatility?
Market volatility refers to the degree of fluctuation in stock prices over a given period of time. It is often measured by the volatility index (VIX), which reflects the market’s expectation of future volatility based on the option prices. A higher VIX indicates a higher level of uncertainty and fear in the market, while a lower VIX indicates a lower level of risk and complacency.
Market volatility can have a significant impact on the performance of momentum funds, as it can affect the momentum factor in two ways: dispersion and reversal. Dispersion refers to the difference in the returns of stocks within a given market or sector. A higher dispersion implies a higher opportunity for momentum funds to identify and exploit the winners and losers. A lower dispersion implies a lower potential for momentum funds to generate excess returns.
Reversal refers to the tendency of stocks to change direction after a period of strong or weak performance. A higher reversal implies a higher risk for momentum funds to suffer from the negative feedback loop, where the stocks that have performed well in the past start to decline and the stocks that have performed poorly in the past start to rise. A lower reversal implies a lower likelihood for momentum funds to lose their edge.
Market volatility can also affect investor behaviour and sentiment, which can in turn influence the demand and supply of momentum stocks. Higher volatility can induce fear and panic among investors, leading to a sell-off of risky assets and a flight to safety. A lower level of volatility can induce greed and complacency among investors, leading to a buying spree of high-performing assets and a disregard for the fundamentals.
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How are momentum funds affected by PSU stocks?
PSU stocks are the stocks of the public sector undertakings (PSUs), which are the companies that are owned or controlled by the government of India. PSU stocks are often considered as defensive and stable investments, as they are backed by the government’s support and have a dominant position in the strategic sectors of the economy, such as banking, energy, mining, defence, etc. PSU stocks are also known for their attractive dividends and low valuations.
PSU stocks can have a mixed effect on the performance of momentum funds, depending on market conditions and sectoral trends. On one hand, PSU stocks can act as a drag on momentum funds, as they tend to have a lower NMS and a lower growth potential than private sector stocks. On the other hand, PSU stocks can act as a boost for the momentum funds, as they can benefit from the positive policy changes, reforms, and divestments initiated by the government.
Some of the sectors that have a high exposure to PSU stocks are railway, power, auto, realty, and defence. These sectors can have a significant influence on the momentum factor, as they can reflect macroeconomic trends, infrastructure development, and national security issues. The performance of these sectors can vary depending on the government’s budget, policies, and initiatives, as well as global and domestic factors.
Which are the best momentum funds to invest in?
There are a few mutual funds in India that follow the momentum strategy and invest in the stocks that are part of the Nifty 200 Momentum 30 Index and the Nifty Midcap 150 Momentum 50 Index. Some of the best momentum funds to invest in are:
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- Samco Momentum Fund: This is an open-ended equity scheme that aims to generate long-term capital appreciation by investing predominantly in the stocks that are part of the Nifty200 Momentum 30 Index. The fund has a low expense ratio of 0.5% and a high turnover ratio of 200%. The fund has delivered a return of 35.6% in the past year and 22.4% since its inception in January 2021.
- Quant Momentum Fund: This is an open-ended equity scheme that aims to generate long-term capital appreciation by investing predominantly in stocks that have had a high NMS over the past six and 12 months. The fund has a moderate expense ratio of 2.3% and a low turnover ratio of 50%. The fund has delivered a return of 28.7% in the past year and 18.9% since its inception in July 2019.
Conclusion
Momentum funds are a type of mutual fund that invests in stocks that have shown strong performance in the recent past based on certain criteria. Momentum funds are often considered a high-risk, high-reward strategy, as they can generate superior returns in a bull market but also suffer heavy losses in a bear market.
Momentum funds are affected by market volatility and PSU stocks, which can influence the momentum factor and investor behaviour. There are a few mutual funds in India that follow the momentum strategy and invest in the stocks that are part of the Nifty 200 Momentum 30 Index and the Nifty Midcap 150 Momentum 50 Index. Some of the best momentum funds to invest in are the Samco Momentum Fund and the Quantum Momentum Fund.
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FAQs
Q: What are momentum funds?
Ans. Momentum funds are a type of mutual fund that invests in stocks that have shown strong performance in the recent past based on certain criteria.
Q: How do momentum funds work?
Ans. Momentum funds use various indicators and metrics to measure the strength and persistence of the stock’s performance. They select and invest in the stocks that have the highest momentum scores and avoid the ones that have the lowest momentum scores.
Q: What are the benefits and risks of investing in momentum funds?
Ans. The benefits of investing in momentum funds are that they can generate superior returns in a bull market, as they can capture the returns from the upward movement of stock prices. They can also benefit from positive market sentiment and investor behaviour. The risks of investing in momentum funds are that they can suffer heavy losses in a bear market, as they can face the negative feedback loop, where the stocks that have performed well in the past start to decline and the stocks that have performed poorly in the past start to rise. They can also face the challenges of identifying the right stocks and avoiding the reversal of the momentum factor.
Q. How are momentum funds affected by market volatility and PSU stocks?
Ans. Market volatility and PSU stocks can have a mixed effect on the performance of momentum funds, depending on market conditions and sectoral trends. Market volatility can affect the momentum factor in two ways: dispersion and reversal. Dispersion refers to the difference in the returns of stocks within a given market or sector. Reversal refers to the tendency of stocks to change direction after a period of strong or weak performance. PSU stocks are the stocks of the public sector undertakings, which are the companies that are owned or controlled by the government of India. PSU stocks can act as a drag or a boost for momentum funds, depending on the government’s policies, reforms, and divestments.
Q: Which are the best momentum funds to invest in?
Ans. There are a few mutual funds in India that follow the momentum strategy and invest in the stocks that are part of the Nifty 200 Momentum 30 Index and the Nifty Midcap 150 Momentum 50 Index. Some of the best momentum funds to invest in are the Samco Momentum Fund and the Quantum Momentum Fund.
