6 Momentum Index Mutual Funds (Underlying index with 30% to 40% CAGR returns in last 5 years)

Want to boost your portfolio’s returns? Momentum index funds might be the high-risk, high-reward strategy you need. Here’s everything you need to know before investing.

introduction

Momentum investing has become a popular strategy among investors looking to take advantage of market trends. Momentum indexes systematically select stocks that have performed well recently and these stocks are expected to continue to outperform in the future. Recently, several AMCs have come up with several momentum index funds, so it is important to understand what momentum indexes are before considering investing in them. In this article, we will discuss momentum indexes, six momentum index mutual funds, their past performance, and who should invest in such index mutual funds.

What is the Momentum Index?

Momentum indexes are stock market indexes that select stocks based on their recent performance or price momentum. The basic principle is simple: stocks whose prices are rising are expected to continue to rise, and stocks whose prices are falling are expected to continue to fall. Momentum indexes are constructed using quantitative rules that include criteria such as past earnings, relative strength, and other momentum indicators.

Main characteristics of momentum indices

1. Trend Following StrategiesMomentum indices are built on the concept of following market trends: stocks with a strong upward trend are included in the index, while stocks with a weak upward trend are excluded.
2. Systematic Selection: Stock selection is done purely quantitatively, following pre-set rules such as historical returns for a particular period (e.g. 6 months or 12 months). This removes emotional bias from the stock selection process.
3. Periodic rebalancing: Rebalancing typically occurs quarterly or semi-annually to ensure that the index continues to focus on stocks with current momentum. This helps the index stay in line with current market trends.
4. Improved turnover rateMomentum indexes tend to have higher turnover than traditional indexes because stocks are frequently added or removed based on their momentum scores.
5. Sector diversificationMomentum indexes may have concentrated positions in certain sectors due to current trends, but maintain sector diversification to manage risk.

Are momentum indices volatile?

Momentum indices are generally more volatile than traditional market cap weighted indices such as the Nifty 50 or S&P BSE Sensex. This high volatility is due to momentum strategies’ focus on fast moving stocks, which can experience large swings during market corrections and downturns. Momentum indices can deliver superior returns in bull markets, but may underperform during periods of high volatility or market reversals.

List of Indian Momentum Indices, Performance and Strategies

There are various momentum indices in India catering to different market segments like large cap, mid cap, small cap etc. Below are some of the major momentum indices available in the Indian market (Source: Niftyindices – Strategy Index)

1. Nifty200 Momentum 30 Index
   • About indexes: The index comprises the top 30 companies with the highest momentum scores from the Nifty 200 universe. The momentum score is based on 6-month and 12-month price returns adjusted for volatility.
   • performance: This index tends to perform well during bull markets but can be volatile during corrections. Historically, it has delivered strong returns compared to broader indices such as the Nifty 50.
     • Annualized return since inception – 21.8%
     • Five-year annualized rate of return – 30.5%
     • 1-year return – 68.9%

2. Nifty Midcap150 Momentum 50 Index
   • explanation: It includes the top 50 most momentum stocks in the Nifty Midcap 150 universe, providing exposure to mid-cap stocks with strong price trends.
   • performanceThe index performs well when mid-cap stocks rise and can deliver strong returns, albeit with a higher risk profile compared to momentum indexes that focus on large-cap stocks.
     • Annualized return since inception – 25.4%
     • 5-year annualized return – 40%
     • 1-year return – 66.1%

3. Nifty500 Momentum 50 Index
   • explanationThe index selects the 50 stocks from the Nifty 500 with the highest momentum score, capturing high momentum stocks across the market.
   • performance: Balances risk across a range of market capitalizations while providing diversified exposure to momentum stocks whose performance is closely tied to the overall market trend.
     • Annualized return since inception – 24.9%
     • Five-year annualized rate of return – 35.7%
     • 1-year return – 69.5%

4. Nifty500 Multicap Momentum Quality 50 Index
   • explanation: Combine momentum and quality factors by selecting stocks that exhibit both strong price momentum and high-quality indicators such as earnings stability and financial strength.
   • performanceThis hybrid approach aims to mitigate some of the volatility typically associated with momentum strategies and provide a balanced return profile.
     • Annualized return since inception – 23.8%
     • Five-year annualized rate of return – 32.5%
     • 1-year return – 71%

5. Nifty MidSmallcap400 Momentum Quality 100 Index
   • explanation: The index focuses on mid- and small-cap stocks and selects the 100 companies from the Nifty MidSmallcap 400 with the highest Momentum and Quality scores.
   • performanceKnown for its potential for big gains during the growth phase, the index incorporates quality factors, helping to mitigate some of the risks associated with small-cap stocks.
     • Annualized return since inception – 24.5%
     • Five-year annualized rate of return – 34.3%
     • 1-year return – 58.4%

6. Nifty Smallcap250 Momentum Quality 100 Index
   • explanation: We have selected 100 momentum blue chip stocks from the Nifty Small Cap 250 to target the small and mid cap segment and capture the high growth potential of small and mid cap companies.
   • performanceThe index performs exceptionally well during small-cap rallies, but is also highly volatile, reflecting the high risk nature of small-cap investing.
     • Annualized return since inception – 24.5%
     • Five-year annualized rate of return – 34.7%
     • 1-year return – 51.7%

Comparison of performance of Momentum Index and Nifty50 Index

Indian momentum indices, focusing on trending stocks, have generally outperformed market indices during bull markets. For example, the Nifty 200 Momentum 30 index has consistently outperformed the Nifty 50 index during periods of market upswing. However, momentum strategies are sensitive to market corrections and may experience sharp declines during periods of increased volatility, proving that these indices are suitable for higher-risk investors.

A management company offering momentum index mutual funds in India

Several asset management companies (AMCs) have launched mutual funds tracking momentum indexes for some time now and have recently offered investors an easy way to get exposure to such strategies.

1. ICICI Prudential Nifty 200 Momentum 30 Index Fund
2. Bandhan Nifty 200 Momentum 30 Index Fund
3. UTI Nifty 200 Momentum 30 Index Fund
4. Motilal Oswal Nifty 200 Momentum 30 Index Fund
5. Edelweiss Nifty Midcap 150 Momentum 50 Index Fund
6. Tata Nifty Midcap 150 Momentum 50 Index Fund

In the coming months, AMC is expected to launch all other momentum index mutual funds to attract investors.

Investors do not have to invest in all six of these index funds, they can choose to invest in one of the indexes.

Which is the best momentum index fund in India?

This depends on your risk tolerance. All momentum index funds are very risky but Nifty 200 momentum index fund (containing large and midcap stocks) is less risky compared to Midcap150 (containing only midcap stocks) momentum fund.

Momentum Index Mutual Funds – Who Should Invest?

Momentum indexing offers a systematic way of capturing trending stocks and offers the potential for high returns when markets are surging. Momentum index mutual funds allow investors to easily leverage this strategy. Momentum investing in mutual funds can be a valuable addition to a diversified mutual fund portfolio, especially for investors looking to enhance returns during the growth phase of the Indian market.

However, they are primarily suited to high-risk investors as they are highly volatile and sensitive to market corrections.

Are you ready to invest in momentum index funds? Share your thoughts and experiences in the comments section below.

Suresh KP is the Founder of Myinvestmentideas. He is a NISM Certified Investment Advisor and NISM Certified Research Analyst. He has been involved in analyzing financial markets for the last 20 years. He can be reached at suresh@myinvestmentideas.com.

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