Momentum funds: Crazy highs to crippling lows

Up until September 2024, momentum funds were all the rage. Fund houses were launching these funds in droves. Their six and one-year performances were solid, too. But after September, as the market tumbled over 10 per cent, they too dropped a stinkbomb on investors, highlighting the challenges of momentum strategies during turbulent times. But before we look at the disparity in performances, let's understand what momentum funds are. What are momentum funds? These funds select stocks with strong price performance, based on the belief that stocks showing good performance will continue to do well. There are 28 momentum funds in total—24 passive and four active. Most of these funds were launched within the last year, with the oldest just three years and eight months old. As of December 31, 2024, the total assets under management (AUM) of momentum funds stood at Rs 20,495 crore, with 77 per cent of the AUM in passive funds. What are momentum funds' benchmarks? Momentum funds have different benchmarks, each tied to a specific parent index. For example, the UTI Nifty 200 Momentum 30 Index Fund replicates the Nifty 200 Momentum 30 Index, whose parent index is Nifty 200. Other funds track different indices, covering large-cap to small-cap stocks, each with its own selection method. The table below outlines these indices and the number of funds tracking them. Momentum funds and their diverse benchmarks Benchmark Number of funds tracking it Parent index AUM (Size) Nifty 200 Momentum 30 TRI 11 Nifty 200  Rs 11,690 cr Nifty 500 Momentum 50 TRI 4 Nifty 500 Rs 1,160 cr Nifty Midcap 150 Momentum 50 TRI 3 Nifty Midcap 150 Rs 1,605 cr Nifty Midsmall cap 400 Momentum Quality 100 TRI 2 Nifty Midsmall Cap 400 Rs 524 cr Nifty 500 Multicap Momentum Quality 50 TRI 2 Nifty 500  Rs 170 cr Nifty Smallcap 250 Momentum Quality 100 TRI 2 Nifty Smallcap 250 Rs 649 cr Note: Number of funds as of January 21, 2025, while AUM figures are as of December 31, 2024. Categories as per Value Research classification. Momentum fund returns Passive momentum funds We analysed the one-year trailing returns of the momentum indices and their parent indices by dividing the period into three phases: