Momentum mutual funds aim to track upward trends in the stock market and invest in them to generate returns. Momentum mutual fund schemes invest in stocks which have shown strong performance consistently or in other words have ‘momentum’ wherein the term "momentum" refers to the speed at which a security's price is increasing.
What Is Momentum Investing
The momentum investing strategy involves “buying high and selling higher”. Investors who deploy this strategy typically choose investments that can help them grow their wealth by riding the growth wave of a specific stock or group of equity stocks.
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While the momentum investing strategy may have been successful in bull markets, given the current state of the markets, the approach might not be as useful for generating returns. Earlier in 2024, the broader markets witnessed positive momentum with both the Nifty and the Sensex hitting record highs at 85,978.25 and 26,277.35 respectively. This strong momentum resulted in gains for momentum investors who banked on the bullish trends seen in the market.
Why Are Momentum Funds Declining
On January 27, the Sensex was down 824.29 points or 1.08 per cent at 75,366.17 levels, and the Nifty was down 263.05 points or 1.14 per cent at 22,829.15. At the current levels, the benchmark indices are trading 13-14 per cent lower compared to their record high levels seen earlier in 2024.
Anand K Rathi, the Co-Founder of MIRA Money, an AMFI registered mutual fund distributor said that since markets are bearish, the momentum is expected to fall faster and that is one of the reasons why momentum funds are witnessing a decline.
“Momentum funds invest in companies that are showing growth momentum which will lead to price changes on the positive side and there is a lot of positive momentum during bull market. Now that we are in a bear market, we expect momentum not to offer any kind of protection, it will actually fall faster and that is the reason why momentum funds are witnessing a decline,” Rathi told Outlook Money.
How Momentum Indices Are Faring
Indian stock markets have come out as the best performers in emerging markets in the past few years. The strong momentum seen in the markets has been driven by tailwinds such as robust domestic growth, strategic government reforms and global liquidity. However, the situation seems to be reversing as signs of slowing momentum have begun to show up. Momentum-focused indices are witnessing a decline and have pared up to 16.01 per cent in just one month.
The Nifty200 Momentum 30 Index which aims to track the performance of 30 high momentum stocks across large and mid-cap stocks closed at 29,039.35 levels on January 20 down by 2.94 per cent. The index has declined 12.9 per cent in just one month from 33,342 levels.
The Nifty500 Momentum 50 Index which tracks the performance of 50 stocks which are selected based on normalised momentum score from the Nifty 500 index also closed in the red on January 27 at 48,916.65 levels down by 3.56 per cent. The index has slipped 16.01 per cent in a month from 58247.9 levels.
Outlook For Momentum Funds In 2025 And What Investors Should Do
Several headwinds have impacted the performance of momentum funds at the macro level such as a decelerating GDP growth rate, rising inflation along with commodity price inflation and disruptions in the global supply chain. Rathi told Outlook Money that closer home the lower-than-expected Earnings Per Share (EPS) and declining earnings growth have also led to the loss of momentum. He added that the decline is likely to continue for momentum funds in 2025.
“Yes, momentum funds will continue to see declines because earnings growth is shattering slowly. EPS is not coming as expected, there is a bit of an earnings issue that we are seeing. So any company that in the past had shown momentum with good positive earnings will now see slowness in earnings that could lead to loss of momentum and we expect this situation to continue forward,” Rathi told Outlook Money.
Rathi told Outlook Money that investors should ideally avoid momentum strategies in 2025. He said that investors can wait for a couple of quarters for a turnaround in earnings growth and then reassess their strategy.
“I think one should avoid momentum strategies for 2025, maybe they wait for a couple of quarters to see if the earnings are turning around and if the turning is turned around, then maybe after a quarter or so they should start looking at investing in momentum. So 2025 doesn't look like a great year for momentum to invest now,” Rathi said.
