Pick as per your risk appetite as momentum can deliver different outcomes depending on the playing field

Which momentum investment strategy works best for you?

In recent years, equity investors have been bitten by the momentum investing bug. The pursuit of recent winners has proved very rewarding. Expectedly, asset management companies have arrived on the scene, launching a bouquet of strategies catering to momentum seekers. Investors can now pick from a platter of momentum funds, each offering a distinct flavour. However, not every momentum strategy will suit your needs.

Momentum-based funds currently enjoy a 40% share of assets parked in factor strategies in the country. In the past few years, several new momentum indices have been launched. Here is what a momentum seeker can bet on right now. In the passive funds basket, investors have a choice of funds mimicking the Nifty200 Momentum 30 index, Nifty Midcap150 Momentum 50 index, as well as Nifty500 Momentum 50 index. These essentially let investors ride winners in distinct playing fields. The Nifty200 Momentum 30 index, which is the oldest of the lot, offers a bet on 30 winning stocks from the 200 largest listed companies. The Nifty Midcap150 Momentum 50 index provides a targeted momentum play on the mid-cap segment. Meanwhile, the Nifty500 Momentum 50 index picks the best performers from a broader universe of 500 stocks spanning the large-, mid- and small-cap market segments.

There are also a couple of multi-factor strategies combining momentum and quality, targeting different market segments. Mirae Asset AMC runs funds based on the Nifty Smallcap250 Momentum Quality 100 index, as well as the Nifty MidSmallcap400 Momentum Quality 100 index. As the names suggest, these funds screen the small-cap and mid/small-cap segments, respectively, for stocks with the finest momentum and quality traits.

With so many offerings, picking a momentum fund is no simple task. All these are smart beta strategies, running a factor tilt on top of a traditional base index. Most have proven ability to outperform the base index riding the momentum factor. To be sure, momentum works in the same manner regardless of the market segment it is pursued in. Yet, investors must choose wisely as momentum can deliver differing outcomes depending on the playing field. Pratik Oswal, Chief of Business , Passive Funds, Motilal Oswal Asset Management Company, says, “These offerings cater to investors with differing risk profiles even if pursuing the same strategy of momentum investing. The key difference is the universe in which they operate.”

Different strategies can help you tap into market winners

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Momentum is a fairly aggressive strategy as it disregards business fundamentals, valuations or margin of safety. It can deliver outsized returns in an uptrending market, but can also see a bigger dent when the market falls. The risk profile can go up further when momentum is played within specific market segments. For instance, pursuing momentum in a large-cap dominated arena can have materially different outcomes than running the strategy within a mid- or small-cap setting. Rushabh Desai, Founder, Rupee with Rushabh Investment Services, observes, “In momentum-based funds, drawdowns can be more severe than in others if heavy on mid and small caps. Historically, bear periods can last longer in mid and small caps. Pairing the two may not work well in certain market phases.” Oswal concurs, “Momentum is anyway a high-risk strategy and running it in the small-cap or even mid-cap arena elevates the risk profile further.” Yet, the Nifty Midcap150 Momentum 50 index makes for a potent strategy with its ability to deliver outsized returns at similar volatility as its base index. It has fetched the highest return among all momentum indices in the past five years. For those who want to pursue momentum in a relatively safer, hygienic environment, the Nifty200 Momentum 30 index is a good fit. However, it may also limit the potential payoff for the investor. Momentum can be pursued safely when combined with factors such as quality or low volatility, particularly in high-risk segments like mid caps or small caps. “A multifactor strategy combining momentum with say, quality, can be a good bet as it combines factors that tend to work in opposing market conditions,” says Oswal. Both Nifty MidSmallcap400 Momentum Quality 100 and Nifty Smallcap250 Momentum Quality 100 have delivered healthy outcomes.

For those seeking bigger rewards without getting locked into a specific market segment, the Nifty500 Momentum 50 index could be the ideal bet. “This index can be a game changer in the flexi-cap arena for serious wealth creation,” contends Desai. As it hunts for winners across market-cap segments, it retains the agility to gain from different outperforming pockets of the market. For instance, the index was running 65% allocation to large caps and another 30% in mid caps in June 2024. In contrast, it had 35% exposure each to mid caps and small caps in December 2023. This agility is missing in nearly all actively run flexi-cap funds, which take a firm large-cap bias.

Investors may also pick from momentum strategies in the actively managed space. Quant Momentum and Samco Active Momentum run their own versions of the ‘buy high, sell higher’ investing philosophy, but both these funds have a higher expense ratio than their index fund counterparts.

This story originally appeared on: India Times - Author:Faqs of Insurances