In a recent episode of Mutual Fund Corner, Kavitha Menon, Founder of Probitus Wealth, and Abhishek Kumar, Founder & SEBI RIA at SahajMoney, explored the nuances of momentum investing.
This investment strategy focuses on selecting stocks based on their price movements, aiming to capitalise on ongoing trends to generate returns that outperform basic index strategies.
Momentum investing explained
Kavitha Menon explained that momentum investing is based on the principle that once price momentum builds in an asset, it tends to continue in the same direction for a considerable period.
This means that stocks experiencing sustained positive price movements are likely to keep rising, while those with negative momentum are expected to continue falling.
This persistence in price trends is what momentum investors seek to exploit to generate alpha, which refers to returns above the market average.
Factor-based, smart beta approach
Momentum investing is recognised as a factor-based, smart beta investment approach.
Unlike traditional market-cap-weighted strategies, smart beta strategies aim to enhance returns by systematically selecting stocks based on specific factors such as momentum.
This method allows investors to potentially achieve better risk-adjusted returns by focusing on stocks exhibiting strong performance trends.
Mutual Funds for momentum investing
Abhishek Kumar highlighted the various mutual funds available for momentum investing.
Currently, there are around 17 funds in this category. Of these, only two—managed by Samco and Quant AMC—are actively managed, while the remaining 15 are passive funds, including both index funds and ETFs.
Passive funds track momentum-based indices, allowing investors to gain exposure to momentum strategies without the need for active management.
Long-term perspective advised
Given the volatility of market trends, Abhishek Kumar advised against short-term approaches to momentum investing.
Instead, he recommended that investors adopt a longer-term perspective.
This approach helps to mitigate the impact of short-term market fluctuations and increases the potential for generating alpha through sustained momentum trends.