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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:
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The rising phase (January 2024 to September 2024)
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The declining phase (September 2024 to January 2025)
- An overall 12-month performance.
The results are summarised below:
| Index | Index's return (Rising phase) | Parent's return (Rising phase) | Index's return (Declining phase) | Parent's return (Declining phase) | Index's return (Trailing 1-year) | Parent's return (Trailing 1-year) |
|---|---|---|---|---|---|---|
| Nifty 200 Momentum 30 TRI | 34.91% | 27.16% | -21.75% | -12.61% | 5.57% | 11.12% |
| Nifty 500 Momentum 50 TRI | 32.29% | 27.29% | -21.79% | -12.49% | 3.47% | 11.39% |
| Nifty Midcap 150 Momentum 50 TRI | 32.72% | 29.04% | -14.89% | -11.88% | 12.95% | 13.72% |
| Nifty Midsmall cap 400 Momentum Quality 100 TRI | 30.01% | 28.47% | -13.62% | -11.90% | 12.30% | 13.18% |
| Nifty 500 Multicap Momentum Quality 50 TRI | 28.89% | 27.29% | -16.96% | -12.49% | 7.04% | 11.39% |
| Nifty Smallcap 250 Momentum Quality 100 TRI | 23.66% | 27.43% | -14.31% | -11.93% | 5.96% | 12.22% |
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All the momentum indices, barring one, outshone their parent indices when the markets were on an upswing.
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When the music stopped, all the momentum indices fell harder than their parent indices.
- And because these indices fell harder in bad times than they had previously grown, none of them could beat their parent index over a 12-month period.
Essentially, the passive momentum indices strutted their stuff in the good times but tripped badly when the market took a nosedive.
Now, imagine someone invested in these indices in January 2024. They'd be on cloud nine by September, watching their Rs 1 lakh in a fund tracking the Nifty 500 Momentum 50 Index grow to Rs 1.32 lakh, compared to Rs 1.27 lakh in its parent index.
Fast-forward a few months later, in January 2025, the tables have turned. The investment value has shrunk to Rs 1.05 lakh, while the parent index investor would still be sitting on Rs 1.11 lakh.
Active momentum funds
Of the four such funds available, only two have been around long enough to boast at least a one-year track record. The table below captures their returns over the same period we reviewed for passively managed momentum funds.
| Fund Name | Fund's return (Rising phase) | Benchmark's return (Rising phase) | Fund's return (Declining phase) | Benchmark's return (Declining phase) | Fund's return (Trailing 1-year) | Benchmark's return (Trailing 1-year) |
|---|---|---|---|---|---|---|
| Quant Momentum Fund | 33.82% | 27.29% | -15.23% | -12.81% | 13.44% | 10.99% |
| Samco Active Momentum Fund | 19.12% | 27.29% | -2.73% | -12.81% | 15.87% | 10.99% |
| Note: Benchmark for both funds is Nifty 500 TRI | ||||||
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Among the two funds, the Quant Momentum Fund outperformed its benchmark during the rising phase, while the Samco Active Momentum Fund lagged behind. However, in the declining phase, the roles reversed—Samco proved more resilient, handling the downturn better than Quant.
- Both the funds with active investing strategies have fared better on a 12-month basis. That said, this is the tale of just two funds.
The last word
1. Chasing recent winners can backfire: Investors drawn to the impressive returns of momentum funds until September 2024 would be bruised right now. A Rs 1 lakh investment in a fund tracking the Nifty 200 Momentum 30 index would have lost around Rs 21,000 in just four months, compared to Rs 12,600 in its parent index, Nifty 200.
2. Limited history and untested over the full market cycle: Momentum funds, both passive and active, are relatively new, with limited data to judge their long-term performance. Many haven't experienced a full market cycle, so only time will tell how they perform in different market conditions. It's crucial to evaluate any fund only after it has navigated a complete market cycle to understand its true resilience.
3. High volatility: Momentum funds can be highly volatile. While they tend to deliver strong returns during bullish periods, they suffer sharper losses during market downturns, as seen with most of the indices above.
Also read: Gold ETFs catch investors' attention: Are these more than just digital gold?
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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