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- 📈 Momentum Funds: Should You Invest?
Welcome to this week’s Altsights!
There are about 20 momentum mutual fund schemes in India that manage ₹15,000 crore worth of assets.
Most of them have been launched in 2024. Right now, 3 momentum funds are available to invest via NFOs.
So naturally, there’s quite a bit of interest and mystery around momentum funds right now.
Today, I’ll be diving deep into the concept of momentum investing and answering the following questions -
- Is momentum investing just another fad or is there substance to it?
- Should you invest in momentum funds?
Getting Momentum On Our Side
Going Against Buffet’s Value Investing 🚀
You probably know value investing - the investment style popularised by Warren Buffet.
It involves buying undervalued companies, waiting for the market to recognise their value and making a profit when it happens.
In essence, value investing is all about finding opportunities earlier than the rest of the market.
Momentum investing, on the other hand, involves buying companies (rather stocks) that have been rising for a while. The belief is that the price will continue to rise further.
So, momentum investing is all about finding opportunities that have already been identified by the market.
What’s gone up will keep going up for some more time.
Does Momentum Investing Work? 🤷🏻♂️
Short answer - Yes! 👍🏼
There’s ample academic research published in the last few decades proving that momentum investing works.
A research article by AQR Capital Management, a marquee investing firm in the US, named ‘Fact, Fiction and Momentum Investing’ says that momentum investing has outperformed passive indices for 200+ years across various global markets.
Capitalmind has collated and summarised similar research articles here → https://www.capitalmind.in/insights/best-momentum-investing-comprehensive-guide
Why Does Momentum Investing Work? 🤔
This is a tricky question because nobody knows the exact answer. There is research but all are mere hypotheses.
But I feel it all comes down to how humans behave.
Anoop from Capitalmind has summed it up beautifully -
When we are buying [a product] online, are we likely to buy the product that has no reviews and ratings or the one that has 20,000 reviews and ratings?
Mutual Funds Sahi Hai for Momentum Investing ✅
Attribute | Mutual Funds | PMS* | Smallcases |
|---|---|---|---|
Professional management | Yes ✅ | Yes ✅ | Yes ✅ |
Hands-Off Investing | Yes ✅ | Yes ✅ | No ❌ |
Tax-Efficient | Yes ✅ | No ❌ | No ❌ |
Low Minimum Investment | Yes ✅ | No ❌ | No ❌ |
*PMS → Portfolio Management Services
But Which Momentum Mutual Fund Scheme(s)? 🤔
As I mentioned at the start, there are about 20 momentum schemes in India.
However, just 1 of them has been in existence for 3+ years → UTI Nifty200 Momentum 30 Index Fund.
It’s important to mention that this is not an investment recommendation.
I am personally invested in this scheme and if I were to suggest to a friend a momentum fund, I’d suggest this one simply for its vintage.
Many shiny new momentum schemes that track shiny new momentum indices may outperform the scheme I have mentioned. But there’s no sure way to know today which schemes those would be.
How Much To Allocate To Momentum? 📊
Believe it or not - some portion of your portfolio is likely allocated to momentum.
Most probably through a mutual fund that follows a momentum approach to a certain degree or maybe through the shares that you bought close to their 52-week highs 😉
Nevertheless, it is important to not overdo momentum in your portfolio despite it being a strategy that works. I say this because, during bear markets, momentum is unlikely to beat plain vanilla indices or the more popular value style of investing.
I have personally allocated about 12-15% of my equity portfolio to momentum through the scheme I mentioned earlier.
So, a range that I would suggest to someone is 10-20%.
Less than 10% is unlikely to make a difference whereas more than 20% may be too much during bear markets.
Hope you liked this week’s Altsights.
See you next week!
Cheers,
Madhu,
Founder, Altcase