Add momentum funds to boost your portfolio returns
Momentum funds are increasingly attracting individuals as these funds invest in assets that are already showing strong performance. The appeal of these funds lies in their ability to generate high returns when the market is on an upswing.
Momentum investing aims to capitalise on the continuation of existing market trends. The top performing funds such as UTI Nifty200 Momentum 30 Index Fund and Motilal Oswal Nifty 200 Momentum 30 Index Fund have given returns of around 60% in one year.
As mid-caps and small-caps have been performing well, momentum funds have been quick to capitalise by launching specialised funds focused on these areas. In fact, assets under management of momentum funds have soared over four times to Rs 15,100 crore in August this year from Rs 3,500 crore during the same month last year.
Robust returns
The robust returns of momentum funds in the last one year is because of the overall rally in the broader market. Regular rebalancing ensures that underperforming assets are replaced promptly with higher-momentum investments, further enhancing their appeal. The combination of market trends, investor behaviour, and strategic agility enabled momentum funds to deliver exceptional returns during periods of market expansion.
Nirav Karkera, head, Research, Fisdom, says momentum funds perform particularly well during sustained market uptrends, as they concentrate on assets with positive momentum. “These can be beneficial for those seeking to enhance portfolio returns by combining them with other strategies, like value or quality investing,” he says.
Soumya Sarkar, co-founder, Wealth Redefine, an AMFI registered mutual fund distributor, says the performance of momentum funds is closely linked to market trends. “If the market experiences a downturn, these funds may also face short-term losses. Therefore, it is crucial to stay invested for an extended period to ride out market volatility,” he says.
Momentum indices
Investors exploring momentum indices have several options, each with distinct advantages and risks. The Nifty200 Momentum 30 Index offers exposure to top-performing large-cap and mid-cap stocks, balancing growth with moderate volatility. For those seeking higher returns, the Nifty Midcap150 Momentum 50 Index focuses on mid-cap stocks, which carry more risk but also provide greater upside potential during growth phases. The Nifty500 Momentum 50 Index captures momentum across the broader market, offering diversified exposure to multiple market segments.
Gurmeet Singh Chawla, director, Master Capital Services, says those with a strong risk appetite should consider momentum indices based on market capitalisation such as the Midcap 150 Momentum 50 Index or the Nifty 200 Momentum 30 Index. “These focus on mid-cap and large-cap stocks with strong price performance. This approach can offer higher returns but comes with more risk and volatility,” says Chawla.
Investment horizons also influence the choice of momentum indices. Swapnil Aggarwal, director, VSRK Capital, says if the investment horizon is around five years, mid-cap stocks would be more suitable. “For investors looking at a shorter time frame of three years, a focus on value stocks, undervalued stocks, and growth stocks is advised,” he says.
For a more balanced approach, investors should look at momentum-plus-quality indices. This blend helps mitigate the volatility associated with momentum strategies, offering a smoother investment experience without compromising on returns. In fact, quality filters ensure the portfolio includes companies with strong fundamentals, reducing the likelihood of steep declines during market corrections. “This makes momentum-plus-quality indices a strategic choice for long-term investors aiming to capitalise on market trends while managing risk more effectively,” says Karkera.