Follow the trend with momentum funds!

They say – ‘It’s all at the moment’. Don’t miss the market moments with momentum funds. Read to know more!

Human psychology is tangled and we are always in fear of missing out (FOMO) on something or the other. A similar applies to investing. The market is ever evolving, and investors usually fear missing the ‘market rallies’. However, it is not easy for an individual to cope with so many different happenings and trends.

In addition, India’s investor population is reaching new heights every other day. This heavy influx leads to multiple investment psychologies and the prevalence of multiple trends simultaneously in the market. These trends create volatility in the market.

However, the market has a pattern of a ‘zero-sum game’, where if one gains, the other loses. So, the multiple trends may create volatility but benefit the ones flowing with them. It is achievable through momentum funds.

It is interesting how the benefits of different trends can be gained with a pool of funds in momentum funds. Let’s explore in detail the funds and the investment strategy driving it.

what is momentum fund

What is a momentum fund?

It is the basket of equity or equity-oriented instruments, driven by a specific momentum investing strategy. The power of market trends is tapped in these funds with the help of technical and fundamental analysis.

These are usually grouped under thematic funds as per AMFI. The main rationale behind this investing is to benefit from the heavy demand influx due to factors such as stock prices, earnings, market sentiments, technical breakouts, etc.

There are two main types of momentum funds:

  • Active – When fund managers frequently buy/sell securities, their momentum in the market.
  • Passive – When the fund managers track an established momentum index in the market and invest accordingly.

In India, there are majorly passive mutual funds that invest directly in the momentum indices.

Momentum mutual funds are a unique investment opportunity to stay aligned with various market trends with the help of professional fund managers. It saves investor’s efforts of finding market trends and hedges them from the FOMO!

Momentum strategy

There are widely two main types of investment strategies:

  • Value investing

It is based on the valuation of a business by accounting for various financial and non-financial aspects. Here, undervalued investments are advised for buying, while overvalued investments are advised for selling. It helps investors tap value when the market is providing a discount. It may not match the market sentiment.

  • Momentum investing

This strategy employs investment in the instruments as per the market trends. For example, Investing during the rise of price and selling during the peak or start of the fall could be the strategies. It helps investors tap the market sentiments.

what is momentum fund

The momentum funds use the momentum investing strategy. There are several ways to analyse the momentum of the market as follows:

Momentum indices

As per AMFI, the benchmark index for momentum funds under the thematic category is NIFTY 500. NSE also has momentum indices, which follow specific categories of instruments. Some of these indices are:

Here, the momentum is assessed for the index, which is mentioned in its name. The final number, like 50 or 100 (in the above examples), indicates the number of companies assessed from the index.

Let’s understand how momentum funds invest with the help of such indices. The NIFTY Midcap150 Momentum 50 is down by nearly 0.55% on August 1, 2024. So, the index funds investing based on this may hold or sell their investment. Otherwise, the fund manager may also indulge in short-selling due to this fall.

Top gainers/losers

The list of daily, weekly, and monthly top gainers or losers indicates the momentum of investments. It is usually used in active momentum funds when fund managers track large security data, and such lists help them process the data. Moreover, data such as movement in price, volume, sector indices, etc, is also used to analyse the momentum.

The market sentiment                   

The attitude of investors towards the market probability of rise, fall, and stability is known as market sentiments. It drives demand for a particular stock, sector or even the whole market. An investor’s attitude is built by various financial and non-financial factors, which later give momentum to the asset. For example, When a company releases its quarterly results, and if the results are good, investors find the company has good prospects. It drives the demand and price of its stocks. So, the stock gains momentum after the results.

 momentum fund

Benefits

Following the trends and investing in momentum funds benefits investors in several ways, such as:

  • Potential returns

The catch of market trends helps to grab the seat before gains are delivered. Due to this, momentum fund schemes have the potential to generate high returns. Momentum mutual funds are run by employing technical and fundamental analysis of market return, which helps them gain in the long term.

The momentum investing strategy itself usually delivers returns higher than its parent benchmark. For example: The NIFTY 200 Momentum 30 index has outperformed its parent index NIFTY 200 in 1 year, 3 years and 5 years period.

Source: National Stock Exchange (NSE)

(Data as of August 1, 2024)

  • Volatility

The price, volume, and other technical indicators help fund managers match the unique point of purchase and sale. Due to such a keen analysis, volatility in the market is assessed in advance, and funds are hedged.

  • Professional fund management

All the mutual funds are managed by professional fund managers. However, momentum investment and funds need management by a person with proper knowledge of technical analysis, price-volume movement, and fundamental analysis. Investors may have to put in much effort to manage funds by momentum investments, but expert fund managers ease the game.

  • Diversification

Mutual funds investing in the momentum index have a large set of companies (as per the particular sector). It provides proper diversification for the portfolio and also drives the momentum of the sector as well as the whole market.

Risks involved

Along with different benefits, momentum funds also have some risk factors which can limit the fund performance:

  • Market reversal

Historical performance of price, volume, indicators, etc, may not always be sufficient to anticipate future performance. Moreover, certain uncertainties have the potential to change the market prices overnight. Such sudden reversal from ongoing trends may affect the investments following the trend.

  • Behaviour bias
    Following a certain trend may not always favour the investors. It is also a herd behaviour, which may risk the investment. The market sentiments are driven by human behaviour, which is unpredictable. So, trends may not move as per investor’s estimations.

Besides the above risks, investors should check the scheme’s riskometer before investing in momentum mutual funds.

Conclusion

Momentum investing using equity and equity-related instruments may require extra care and effort by the investors. However, the momentum mutual funds help diversify investment in momentum indices of the market. It also helps catch the trend most aptly with the help of fund managers. Momentum funds can be a suitable option for investors with FOMO.

DISCLAIMER: This article is not meant to be giving financial advice. Please seek a registered financial advisor for any investments.

   

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