Momentum investing in India | Should you go for it? | Everything you need to know

Momentum Investing is gaining much popularity all around the world and involves a strategy where one expects past winners to win a little more and past losers to lose a little more. In this video, ETMONEY’s Shankar Nath looks at what the momentum strategy is, how is it built, how has it performed in India and does it really work in India. We specifically use the Nifty 200 Momentum 30 Index in this study

What’s covered in this video?
00:00 Introduction
01:00 What is Momentum Investing?
03:05 How to Build a Momentum Investing Strategy?
08:38 Nifty 200 Momentum 30 Index
12:20 Performance of Momentum Investing in India
14:51 ETMONEY Opinion
👉 WHAT IS MOMENTUM INVESTING?

Momentum investing is the practice of betting positively on past & recent winners and negatively on recent losers.

The most common approach is upward momentum where investors put money into the stock of a company whose price is on an upward trajectory in the hope that this upward price momentum will continue for some more time. In other words, while the traditional investor thinks in terms of buying low and selling high, the momentum investor aims at buying high and selling even higher

Now, momentum can be downward also which means the stocks that have underperformed recently have a tendency to go down even further in the short term. It’s this high-higher and low-lower effect that the entire momentum strategy hinges on.

👉 NIFTY 200 MOMENTUM 30 INDEX

The S&P BSE Momentum Index was launched in December of 2015. And Nifty 200 Momentum 30 Index which was launched by NSE Indices in August last year

In this video, we have focused on the Nifty 200 Momentum 30 Index because there is an index fund in which one can invest into i.e. the UTI Nifty 200 Momentum 30 Index

The construct of a momentum index is based on a set of rules and criteria which can be divided into 5 separate buckets -
1. Universe of stocks
2. Basic construct
3. Weighting criteria
4. Constraints
5. Periodic maintenance

Link: https://www.niftyindices.com/Methodology/Method_NIFTY_Equity_Indices.pdf#page=85

👉 PERFORMANCE OF NIFTY 200 MOMENTUM 30 INDEX

Globally, momentum investing has enjoyed a strong run for many years. The only cracks appeared when the stock markets went into a tailspin as experienced in the year 2000, 2008 and 2020

From an Indian context, the Nifty 200 Momentum 30 Index has been the highest performing index across all five indices (incl. NIFTY 50, NIFTY Next 50, NIFTY Midcap 150 and NIFTY 200)
in 7 out of the 15 years under consideration

In fact, when we compared them individually, the Nifty 200 Momentum 30 has returned more than the Nifty 50 in 10 years and has overpowered the Nifty 200 in 12 years

👉 SHOULD YOU INVEST IN THE NIFTY 200 MOMENTUM 30 INDEX FUND?

Pros:

1. It’s a passive fund i.e. all systems on selection, ranking, weights, inclusions, exclusions, cappings etc. are all automated and there are no biases like what we see in an actively managed fund. Plus lots of transparency in the process

2. Different portfolio mix to the benchmark like Nifty 50 or Nifty 200. This can offer some diversification.

3. Performance of the Nifty 200 Momentum 30 Index if higher than many other indices

Cons:

1. Some studies show that 6-month rebalancing might be a bit too long and that rebalancing should be done every 2 or 3 months.

2. Some global momentum-based funds also have in-built alerts that allow the system to automatically rebalance at times of big spikes and big shocks like what we saw in March of 2020. This is not currently available with the Nifty 200 Momentum 30 Index

3. Momentum funds can be more volatile than other funds in spite of the automated rules which are in place.

4. This index fund is likely to have a relatively higher expense ratio as compared to other index funds

Net-net, we think the Nifty 200 Momentum 30 fund requires some consideration and can be a good addition to a long term and disciplined investing portfolio.

In fact in numbers, a monthly SIP started from January 2006 in the Momentum 30 index would have yielded a delicious 16.9% annualized returns as compared to 11.3% returns from the Nifty 50.

#ETMONEY #MomentumInvesting #Nifty200Momentum30Index

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