Momentum Funds Beat Market With Smart Bets

Actively managed momentum funds have demonstrated superior performance compared to the Nifty and passive funds over the preceding year. Their strategy involves algorithm-driven stock selection and shorter holding periods, which proved effective in navigating a volatile market. Significant gains were also achieved through larger allocations to outperforming mid- and small-cap stocks.

The Nifty 200 Momentum 30 Index saw a decline of 2.1% in the past year. In contrast, top-performing funds like the Motilal Oswal Active Momentum Fund returned 22%, benefiting from a substantial allocation to small-cap stocks. Similarly, the Union Active Momentum Fund delivered an 11.5% return, also with a high percentage in small and mid-caps.

This proven market-beating potential has led to the recent launch of new active momentum funds by firms including ICICI Prudential, Kotak Mahindra, and NJ Mutual Fund. These funds employ quantitative models to adjust portfolios based on strengthening price trends and weakening momentum, allowing for rapid responses to market changes.

Fund managers emphasize that active momentum investing offers advantages beyond quantitative models, including the ability to leverage research, judgment, and manual intervention for better risk management. This includes controlling liquidity and intervening when external events might impact holdings.