Momentum Funds: The Complete Guide for Everyday Investors

In the investing world, certain stocks tend to keep winning for a while, showing strong upward trends over time. Momentum funds are designed to spot these high-performing stocks, those that are already gaining steam and invest in them. The idea is simple: stocks that have been doing well recently are likely to continue their upward journey, at least for some time. Just like a runner who builds speed and maintains it through a race, momentum funds aim to ride the wave of winning stocks to generate good returns for investors. Understanding how momentum funds work can help you decide if this investment strategy fits your financial goals and risk appetite.

In simple words, momentum funds are mutual funds that invest in stocks or assets showing strong recent performance. They aim to ride the wave of rising prices. But what exactly are momentum funds and momentum funding? How do they work? Are they safe? And should you invest in them? This detailed guide will answer all your questions, step by step, in the simplest way possible.

What Are Momentum Funds?

Momentum funds are a type of mutual fund or investment fund that follows a specific investing strategy called momentum investing. The idea behind momentum investing is pretty straightforward stocks that have done well over the recent past (say the last 6 months or a year) are likely to keep doing well for some time. On the flip side, stocks that have performed poorly will probably continue to struggle.

So, momentum funds pick stocks based on their recent price performance and try to profit from this trend. These funds typically buy shares in companies whose prices are rising and sell or avoid companies whose prices are falling.

Why Does Momentum Investing Work?

The logic behind momentum investing is linked to human psychology and market behavior:

• When a stock starts rising, more investors notice it.
• This increased interest pushes the price even higher.
• Positive news, good earnings, or market hype can create a snowball effect.
• Investors tend to follow the crowd, and trends can last for weeks or months.

However, like riding a wave, momentum doesn’t last forever. Eventually, the wave breaks, and prices can fall sharply. But the goal of momentum funds is to ride the wave for as long as possible and exit before it crashes.

Momentum Funding vs Momentum Funds

Before diving deeper into the topic, it’s really important to clear up a common confusion for many beginners: momentum funding and momentum funds are two very different things.

• Momentum funds are a type of mutual fund that invests in stocks or assets showing strong recent price performance. These funds follow a strategy called momentum investing, where they buy stocks that have been going up in price, expecting the trend to continue.
• On the other hand, momentum funding is an unrelated term, mostly used in the world of legal finance. It refers to companies or lenders providing fast cash advances to people involved in legal cases, such as lawsuits or claims. The money provided through momentum funding helps cover legal expenses or personal needs before a case settles. This type of funding has nothing to do with the stock market or mutual funds.

So, to sum up, when you hear momentum funds, think about investment products that focus on rising stocks and financial markets. When you hear momentum funding, remember it relates to legal case financing, not investing.

How Do Momentum Funds Work?

Now that you know what momentum funds are, let’s understand how they actually operate.

Stock Selection Process

Momentum funds use specific rules or algorithms to select stocks. Here’s the usual approach:

1. Screening Stocks by Past Performance:

The fund looks at the stock price changes over the last 6 months, 9 months, or 12 months. Stocks that have gained the most during this period become candidates for investment.

2. Adjusting for Volatility:

Simply picking stocks with the biggest price jumps can be risky. Funds often adjust for volatility meaning they avoid stocks that have wild, unpredictable price swings, focusing on smoother upward trends.

3. Building a Portfolio:

From the filtered list, the fund managers choose a diversified mix of stocks across industries to avoid concentration risk.

Active vs Passive Momentum Funds

• Some momentum funds are actively managed, where fund managers use their judgment combined with quantitative models to buy and sell stocks.
• Others are passive momentum mutual funds, which track momentum-based indices like the Nifty200 Momentum 30 Index or Nifty Midcap150 Momentum 50 Index. These indices rank stocks by momentum and update their lists regularly.

Portfolio Rebalancing

Momentum funds usually rebalance their portfolios frequently, often every month or quarter to keep up with changing trends. This means selling stocks that are losing momentum and buying ones gaining it.

Why Should You Consider Investing in Momentum Funds?

Many investors are drawn to momentum funds because of their unique advantages. Let’s talk about some of the main benefits:

1. Potential for Higher Returns

Since momentum funds invest in trending stocks, they often capture fast-growing companies early and ride their upward trajectory. This can lead to better returns than traditional mutual funds that may hold stocks regardless of recent price trends.

2. Diversification Across Sectors

Momentum funds typically invest in a range of sectors like technology, finance, consumer goods, and industrials based on which stocks have strong price momentum. This spreads out risk.

3. Quantitative and Systematic Approach

Instead of relying purely on human instincts or emotional decisions, momentum funds use systematic, rules-based investing. This reduces the chances of impulsive buying or panic selling.

4. Adaptive to Market Changes

Since momentum funds regularly update their portfolios based on recent data, they can quickly shift to new opportunities or exit weakening stocks.

Risks Associated with Momentum Funds

While momentum funds have advantages, they come with some risks. You should understand these before investing.

1. Market Volatility and Corrections

Momentum investing works well during stable or rising markets. However, when the market turns volatile or falls sharply, momentum strategies may suffer losses because they are focused on recent winners that might get hit hard.

2. High Portfolio Turnover

Because momentum funds buy and sell frequently to keep up with trends, this can lead to higher transaction costs and taxes.

3. Risk of Buying Overvalued Stocks

Momentum funds can sometimes chase “hot” stocks that have already risen a lot, leading to buying at high prices just before a correction.

4. No Guarantees

Like any investment, momentum funds don’t guarantee profits. Trends can suddenly reverse due to unforeseen news, economic changes, or market sentiment shifts.

Momentum Mutual Funds in India: What Are Your Options?

India’s mutual fund industry has embraced momentum strategies, with several options available for investors.

Popular Momentum Mutual Funds

Here are a few momentum mutual funds you can consider:

• Bandhan Nifty200 Momentum 30 Index Fund: Tracks the Nifty200 Momentum 30 Index, investing in 30 top-performing large and mid-cap stocks.
• Edelweiss Nifty Midcap150 Momentum 50 Index Fund: Focuses on mid-cap stocks with strong price momentum.
• ICICI Prudential Nifty 200 Momentum 30 Index Fund: Another fund tracking the same momentum index.
• Quant Momentum Fund: An actively managed fund that uses proprietary models to identify momentum stocks.
• UTI Nifty200 Momentum 30 Index Fund: Provides exposure to high momentum stocks in the Nifty 200.

How to Choose a Momentum Mutual Fund?

• Check the Track Record: Look at the fund’s historical returns and volatility.
• Expense Ratio: Momentum funds can have higher expense ratios due to active management or frequent trading. Choose a fund with reasonable fees.
• Fund Manager’s Experience: Experienced managers can better navigate momentum trends.
• Fund Size: Large funds may have liquidity advantages.

Understanding Key Terms: Momentum Funding and Momentum Mutual Fund

You might see these terms often:

• Momentum funding usually means providing financial advances or loans based on future earnings, unrelated to stock investing.
• Momentum mutual fund is just a mutual fund that invests using momentum strategies.

For this article, we focus on momentum funds meaning momentum mutual funds.

How to Invest in Momentum Funds?

Investing in momentum funds is similar to investing in any mutual fund:

1. Open an Account: You can invest directly via mutual fund websites, through a broker, or platforms like SMC Global Securities.
2. Understand the Fund: Read the fund’s scheme information document (SID), which explains the strategy, risks, and expenses.
3. Decide Your Investment Amount: Choose whether you want to invest as a lump sum or via SIP (Systematic Investment Plan) investing fixed amounts regularly.
4. Monitor Regularly: Keep an eye on how the fund performs, but avoid panic selling during temporary downturns.

Taxation of Momentum Funds in India

Like all mutual funds, momentum funds are subject to capital gains tax:

• Short-term capital gains tax (STCG): 15% if units are sold within 12 months.
• Long-term capital gains tax (LTCG): 10% on gains exceeding ₹1 lakh if units are held for more than 12 months.

Since momentum funds have higher turnover, you may face more STCG, so tax planning is essential.

Final Thoughts: Should You Invest in Momentum Funds?

Momentum funds can add an exciting dynamic to your investment portfolio by:

• Taking advantage of market trends.
• Offering a systematic approach to selecting winners.
• Potentially delivering higher returns in bullish markets.

However, the higher risk and costs mean you should invest carefully and ideally as part of a balanced portfolio.

Conclusion

Momentum funds are an innovative way to invest, focusing on stocks that have shown strong recent performance, hoping to ride their upward trends. They combine quantitative strategies and market psychology to capture growth opportunities.

While they offer the potential for higher returns, momentum funds also carry risks like market volatility and higher costs. Understanding these aspects and choosing the right fund can help you make informed decisions.

For personalized advice and easy access to top momentum mutual funds, connect with SMC Global Securities your trusted partner in investment.

Author: All Content is verified by SMC Global Securities.