Enter momentum funds high-risk, high-reward technique with 7-year horizon | Mutual Fund – Prime Tales

How do they work?

A momentum-based issue index selects shares from indices like Nifty 200 or Nifty 500, specializing in these displaying the very best value development over the previous 6 or 12 months.

“Some momentum methods don’t rely solely on momentum but in addition take into account alpha, whereas others go for shares displaying excessive volatility-adjusted returns,” says Arun Kumar, head of analysis, FundsIndia.

Momentum investing focuses on shopping for rising shares. “It’s the antithesis of worth investing, the place one picks shares which are falling,” says Deepesh Raghaw, a Securities and Trade Board of India (Sebi)-registered funding adviser (RIA).

Adaptive technique

Momentum is an adaptive technique, rotating into the elements of the market which are performing properly—whether or not largecap, smallcap, high quality, or worth. “It’s fashion, sector, and market cap agnostic,” says Oswal.

Excessive-churn fund

Momentum funds could be 10-15 per cent extra risky than the Nifty 50. “Throughout a market correction, the drawdown could be increased than in a Nifty 50 fund,” says Oswal.

These indices choose shares primarily based on current efficiency with out essentially contemplating high quality. “In direction of the top of a bubble market, low-quality shares are likely to do properly and may enter the portfolios of momentum funds. When the bubble bursts, these shares take a major hit,” says Kumar.

The technique additionally includes excessive portfolio turnover. “Managing such a high-churn portfolio turns into difficult as soon as the fund’s belongings beneath administration (AUM) develop massive,” says Kumar. Furthermore, a broad index just like the Nifty 500 accommodates illiquid shares, and enormous purchases might push up the common buy value, negatively affecting returns.

Whereas the momentum technique has delivered prior to now, related efficiency might not get repeated. Furthermore, these funds have restricted stay monitor data. “Funds primarily based on particular indices are sometimes launched when these indices present sturdy previous returns. Nevertheless, as cash flows into the technique, future returns can diverge considerably from back-tested outcomes,” says Raghaw.

Do you have to make investments?

Raghaw suggests investing in momentum funds solely in case you have conviction. It will enable you to keep invested through the inevitable durations of underperformance.

“Diversify your portfolio throughout 5 completely different types— momentum, worth, development, high quality, and mid- and small-cap— allocating 20 per cent to every,” says Kumar. When you observe this method, momentum funds can kind a part of your core portfolio.

In case your core portfolio is constructed round market cap-based indices like Nifty 50, take into account together with a momentum fund in your satellite tv for pc portfolio, allocating 10-20 per cent of your complete fairness holding. Enter these funds with not less than a seven-year horizon.

First Revealed: Sep 17 2024 | 8:04 PM IST