In the dynamic landscape of investing, every investor looks for that slight edge—something that can consistently outperform conventional methods. One such promising concept is the momentum factor, a strategy that has gained considerable traction in recent years, especially in India. By systematically targeting stocks with strong recent performance, the momentum factor offers a rule-based approach that blends the advantages of active and passive investing.
So, what makes this strategy so attractive in today's market, and how can Indian investors utilise it to improve their portfolios?
What is momentum investing?
At its core, momentum investing mutual funds rely on a straightforward idea: stocks that have been rising are likely to continue rising in the near term. This principle is built on the assumption that trends persist and that investor behaviour—especially the tendency to follow the crowd—helps fuel ongoing price movements. In this sense, the momentum factor challenges the age-old wisdom of “past performance is no guarantee of future returns” by showing that recent winners can, in fact, keep winning—at least for a while.
Indian investors are increasingly recognising the merits of momentum mutual funds. These funds scan the market for top-performing stocks over recent months and allocate more weight to those continuing their upward trend. It is an approach that does not rely on predicting the future but rather follows evidence of performance already in motion.
How smart beta strategies work
Smart beta funds are gaining prominence as they attempt to capture the best of both worlds: the cost efficiency and transparency of passive investing, and the targeted outperformance potential of active strategies. Traditional index funds typically weight stocks by market capitalisation. In contrast, smart beta mutual funds select and weight stocks based on specific factors, such as value, volatility, or momentum.
Among these, the momentum factor is especially suited to market conditions where clear trends emerge. By incorporating momentum factor investing, smart beta mutual funds can focus on stocks that display consistent upward momentum. This disciplined, rules-based methodology seeks to avoid emotional decision-making and instead relies on systematic screening criteria, making it more objective than discretionary fund management.
Benefits of momentum investing
The appeal of the momentum factor lies in its potential for enhanced performance. Investors who incorporate momentum investing mutual funds into their portfolios often benefit from the strategy’s ability to capitalise on persistent market trends. This may be particularly advantageous in bullish environments where stocks continue to climb for extended periods.
Another benefit is diversification. Momentum strategies tend to create dynamic portfolios that regularly rotate holdings based on changing trends. This avoids over-concentration in underperforming sectors and keeps the portfolio aligned with evolving market conditions. It also offers a level of flexibility, as smart beta funds can shift exposure as new momentum signals appear.
In India, where the mutual fund industry has seen robust growth, strategies like the momentum factor help bring sophistication to the average investor. Many of these investors begin with a SIP, or Systematic Investment Plan, into these niche fund categories. The discipline of monthly investing combined with the precision of a factor-based strategy like momentum makes for a compelling long-term approach.
Risks of momentum-based strategies
Despite its appeal, momentum factor investing is not without risks. The biggest concern is its sensitivity to market reversals. Trends can change rapidly, and stocks that once outperformed may suddenly lose favour. During such phases, momentum mutual funds may experience sharp drawdowns.
Additionally, transaction costs can be higher due to frequent portfolio rebalancing, although smart beta mutual funds attempt to mitigate this through semi-automated processes. Indian investors must consider their own risk appetite and investment time frame before embracing momentum-based strategies.
It is also worth noting that mutual fund investment in momentum strategies should be part of a broader, diversified portfolio. Blindly following past winners without an understanding of underlying market forces may lead to volatility. A considered approach using tools such as a SIP calculator can help investors estimate future returns and decide on suitable SIP amounts to meet their financial goals.
Using momentum factor for your portfolio
For investors seeking to modernise their investment approach, the momentum factor offers a structured path. It complements traditional equity investments by focusing not on undervaluation or company fundamentals, but on proven price strength. The idea is simple: let the winners continue winning.
To incorporate this strategy effectively, consider starting a SIP into momentum investing mutual funds or smart beta funds that use momentum as a primary screen. These funds are available through most major asset management companies and can be easily tracked through performance reports and risk metrics.
Investors can also use a SIP calculator to plan their contributions and estimate how their mutual fund investment may grow over time under different rate assumptions. This offers clarity and encourages goal-based investing, rather than random selection of trending stocks.
Conclusion
Factor based investing demonstrates how rule-based, evidence-driven strategies can add value to modern portfolios. Particularly when packaged within smart beta mutual funds, it allows investors to access high-performing trends with the discipline of passive investing and the potential upside of active selection.
While no strategy is infallible, momentum factor investing offers an intelligent, flexible, and transparent method of participating in market growth. When combined with the regular discipline of a SIP, and aided by planning tools like a SIP calculator, the result can be a resilient and rewarding investment journey.
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS. READ ALL SCHEME RELATED DOCUMENTS CAREFULLY
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
