Investment Avenue: Should you put money into momentum funds?

Momentum investing is appealing, but can momentum funds replace other equity funds in a portfolio? Let us investigate.

Momentum investing is a method in which investors buy equities as they rise and sell them when they reach euphoria. The objective here is to take advantage of the volatility by looking for buying chances in short-term uptrends and selling when the equities begin to lose momentum. Following the sale, the investor either invests in cash while waiting for the next chance or just rebalances their portfolio to capture equities that are expected to experience a short-term rise and continue the process.  

The risk of using the momentum method is that investors may enter a position too early or quit the stock too late, missing out on significant technical movements. That being stated, is it a good idea to invest in mutual funds that use the momentum strategy? In this post, we will discover the same.  

During the epidemic, the method gained popularity as markets and equity mutual funds reached new highs. Furthermore, because this approach favours investing in equities that are driving on momentum, it stands to gain from market volatility. Let us compare the Nifty 200 Momentum 30 index to the Nifty 50, Nifty 200, Nifty 500, Nifty Midcap 150, and Nifty Smallcap 250 Total Returns Index (TRI) to better comprehend it. The research spans the period from April 2005 until the present.  

Nifty 200 Momentum 30 TRI outperforms all other indices in all rolling returns periods, as seen in the table above. We compared the median rolling returns over one, three, and five years. That said, returns are only one aspect of the tale. In the other half, we must consider the risk that it is undertaking in order to achieve such higher returns.  

To understand the risk component of the tale, we evaluated the maximum drawdown of the various indices. As you can see, it is highly risky and can result in major wounds at times. When the markets are rising, momentum funds perform well; but, when the markets are down, momentum funds tend to suffer. Having said that, it is sensible to accumulate units of momentum funds in a sinking market since these funds will help improve your portfolio when the market swings back up. 

The funds that adhere to the momentum approach are listed below.