Momentum & alpha funds: Better than even small-cap funds?

If you thought small-cap funds have been rocking it, let us introduce you to momentum and alpha funds. Over the last 12 months, six momentum and alpha funds - i) Nifty 200 Alpha 30 ii) Nifty Alpha 50 iii) Nifty Alpha Low Volatility 30 iv) Nifty 200 Momentum 30 v) Nifty Mid-Small Cap 400 Momentum Quality 100 vi) Nifty Small-cap 250 Momentum Quality 100) - have gunned out 59 per cent growth on average, much higher than even the impressive small-cap index's 53 per cent returns. Sitting on the high table with small caps (and even mid-caps) is no small feat. Beating them in a bull run is even more impressive. No wonder the smart money is looking at momentum and alpha strategies with keen interest. But before you accuse us of short-termism, let's look at their simulated long-term performance. Simulated because we had to back-test the data as the funds tracking these strategies are fairly young. Even on that front, they seem pretty solid. Here's what we found when we looked at their five-year rolling daily return from April 1, 2010, to September 13, 2024, and compared them with their parent indices. Alpha funds delivered the highest five-year rolling returns but also exhibited sharper drawdowns, indicating high volatility (standard deviation). Momentum funds maintained strong median performance and had comparatively limited negative returns. However, their volatility is concerning. Overall, momentum and alpha indices outperform their parent indices (Nifty 200, Nifty 100, and Nifty Smallcap 250) but suffer deeper cuts in bearish markets. Low volatility and quality-focused versions of these indices outperformed small- and mid-cap indices with relatively lower volatility. However, other momentum and alpha funds underwent higher fluctuations, suffering more days of negative five-year rolling returns than their parent indices. In short, momentum and alpha indices have performed well in the long term but can be volatile, especially during market downturns. Alpha and momentum indices outperform broad-based index parents but risks abound Indices Minimum Median Maximum Days with negative rolling returns Standard deviation Nifty 200 Momentum 30 -3.04% 17.81% 29.65% 1.59% 6.35% Nifty 200 Alpha 30 -9.23% 16.10% 33.61% 8.81%