Momentum Funds in the Bull Run: Things You Need to Know
Geojit Financial
One of the leading investment services companies in India, with a strong presence in the GCC countries.
Momentum Funds Get Their Moment with Gen-Z Trends
In this age of social media trends and fast-paced consumerism, society’s choices are more often than not governed by trends. With Instagram Reels and YouTube Shorts updating us on-the-go on current trends, we are always in the loop. So, why not ride the wave when considering mutual fund investments?
Introducing Momentum Investing
Speaking of trends in investing, 2024 has been a year for momentum funds in India. But what are these “momentum funds”?
Simply put, a momentum fund is a type of investment fund that invests in the share market based on the hottest trends. And no, it doesn’t mean a trending song or a dance hook move. In investment, current trends mean earnings and price movement updates. With these funds just completing 1 year in the Indian market, they have already delivered a little more than 65% in average returns as a category.
With High Returns Come Higher Financial Responsibility
Momentum fund managers invest in equity based on share momentum. They do not shy away from shorting company stocks with negative momentum. Momentum funds are often seen as high-return investments; however, they need active and thorough monitoring.
This is due to the fact that momentum factors — the trends that determine the performance of momentum funds — are, at times, short-term. Therefore, these funds are prone to severe ups and downs, as well as systemic risks. But they provide some impressive returns!
Meet Momentum Indices
So, let’s see what these factors indeed are that make momentum funds a catch! The most common attributes, are, of course, revenue (topline), earnings (bottomline), and price movement. Monitoring these for each company in a fund can be a cumbersome process — it can scare away many an investor. This is where momentum indices come to the rescue.
In India, various momentum indices are used by fund managers to manage these funds:
These indices include company stocks carefully chosen based on their price performance over the past six to 12 months, adjusted for volatility.
Based on the common factors mentioned earlier and fundamentals such as value, size, and quality of stocks, momentum indices assign a ‘Normalised Momentum Score’ to each stock. This score, adjusted for fluctuations in daily price, helps momentum fund managers monitor funds actively and make sound decisions.
Investing in the Momentum Fund Wave
As an investor keen on adding momentum funds to your investment portfolio, we hope this newsletter provides you with a better understanding of the basics. Before investing, check out if the momentum fund’s risk factor and investment philosophy align with your investment mantra!
In India, momentum investing is in its nascent stage. This means most momentum funds are passive. While most traditional funds focus on revenue forecasts and earnings, momentum funds work based on past performance and current investment trends.
We, at Geojit, help investors gain more investment knowledge on the latest trends in the market, with our timely newsletter, research, and offerings. For, a hungry learner makes for a sound investor. We wish you the very best on your investment journey!