Momentum-focused mutual funds
COMBINING PRICE and earnings actions for smart momentum investing
Equities are driven by a multiplicity of factors. These factors or characteristics that are thought to move these securities can vary. Momentum, low volatility, value, quality and growth are some such factors.
Think back to the equity markets from 2002-2007 and more recently to 2020-2025. Indices were mostly on a heady rally in both these phases (earlier and also in recent years), though there have been odd short periods of dips in those years.
When we invest based on the expectation that the price trend of a particular investment is likely to persist on its upward trajectory, like mentioned above, we are essentially investing based on momentum.
Making trends work
Now, while following the momentum trends it is important to remove any biases or emotions in the buying and selling decisions by adopting a disciplined process.
Disposition effect—selling securities too soon immediately after a short spell positive price action and holding on to loss-making assets—is to be avoided.
A good momentum strategy would enable investors to exit at or close to the peak price levels of a security, thus realising the maximum potential. So, riding on winning trends for longer is important.
Momentum investing also transitions across investment styles as it captures market trends. For example, the sovereign debt crisis in the European Union from late 2010 till the better part of 2012 resulted in market preference moving away from value to quality stocks in search of greater safety and lower risks/volatility.
In 2014, when a new government with full majority was ushered in, the style preference pivoted towards growth investing as the focus on structural economic reforms and FPI buoyancy was anticipated.
Adding earnings momentum
As mentioned earlier, momentum can also come from positive earnings trajectories. By following an active momentum style of investing, which involves combining earnings and price action, it is possible to ensure robust outcomes. So, companies that beat earnings estimates consistently and enjoy multiple upgrades (consensus) from analysts tracking these firms hold the momentum key. Earnings momentum style uses more of fundamental analysis to determine investment worthy names.
Strong businesses that have moats, rising margins and superior operational efficiency are preferred as these are the key drivers of earnings growth.
When momentum is backed by earnings, the trend tends to be sustainable for longer periods. Trend reversal happens quite late unless there is a severe disruption due specific economic events.
Price momentum combines stocks with positive trends across periods and favourable risk-adjusted performance. It uses more of technical analysis as price action alone is taken into account. The key drivers for price momentum are market sentiments, technical factors and investor behaviour.
A Fund Designed for Momentum
Seeking investments that are riding a wave of positive growth, identifying stocks demonstrating sustainable momentum—fuelled by favourable earnings upgrades or robust price performance—requires a disciplined approach combining fundamental and technical analysis. Momentum-focused mutual funds, like the ICICI Prudential Active Momentum Fund, provide a convenient and professionally managed way to capitalise on these trends. The fund is designed to generate capital appreciation by investing in a portfolio of stocks exhibiting strong upward momentum, utilising a systematic process to identify and select stocks based on their price performance and earnings upgrades. With a New Fund Offer (NFO) period running from July 08, 2025, to July 22, 2025, investors can gain access to this opportunity.
The writer is Mutual Fund Distributor