The previous yr has been extraordinarily profitable for practitioners of momentum investing. Simply put, this can be a technique that buys shares which have completed nicely within the current previous within the hope that the pattern will proceed.
There are completely different variants and completely different indices monitoring momentum investing. For occasion, the Nifty Alpha 50 Index picks shares with the very best alpha over the previous yr—alpha being extra return over the market after adjusting for a inventory’s sensitivity to the market (beta). Another index, the Nifty 200 Momentum 30, picks the shares which have risen probably the most within the Nifty 200 over the previous six months and one yr after adjusting for volatility as measured by customary deviation. Both indices have completed nicely over the previous yr with the Nifty Alpha 50 up 126.26% (as of 31 May) and the Nifty 200 Momentum 30 up 68.95%. The Nifty 50 itself was up 64.43% over the identical interval.
Alternatives to mutual funds resembling smallcase additionally function momentum methods. For occasion, the Capital Mind Momentum Portfolio on smallcase has given round 60% CAGR (compounded annual progress price) since its launch in January 2019.
A weblog publish revealed by Capital Mind on 10 December 2019 delved into the previous returns of momentum investing utilizing historic knowledge from India markets. It outlined a easy momentum technique and back-tested it earlier than contemplating extra advanced variants.
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“On the primary buying and selling day of the month, we rank all shares based mostly on their absolute return over the past 52 weeks (1 yr). Buy the highest 30 shares in equal weight from this record. Rebalance each month,” the post stated. “ ₹100 in Jan 2007 in a simple 30-stock monthly rebalance momentum strategy would be ₹464 today. The same amount in the Nifty and the Nifty 500 would be close to ₹300. This translates to an annual return of 12.6% from momentum, while the Nifty and Nifty 500 did 8.9% and 8.7% respectively,” it discovered.
The momentum technique, nevertheless, flies within the face of the environment friendly markets speculation—a concept that means markets instantly think about all publicly out there info right into a inventory’s value.
However, Deepak Shenoy, founder and chief govt officer (CEO) of Capital Mind, doesn’t set a lot retailer by the idea. “We assume markets are environment friendly, they don’t seem to be. There is all the time info arbitrage—some folks can have info earlier than others, and people earlier than even others, and many others., which explains why shares pattern,” stated Shenoy.
On the flip facet, momentum investing carries higher threat and for that motive has largely been a fringe idea in India’s mutual fund trade. The technique underperforms when the market cycle adjustments resembling a pointy drop or a pointy restoration “This isn’t a method for the faint-hearted. Momentum underperforms markets by a distance when markets right sharply,” the Capital Mint weblog publish added.
Other consultants really feel that momentum investing works in sure phases of the inventory market and never others. “I believe momentum as a method works when market valuations are low. Let’s say a momentum technique at 7,500 Nifty makes extra sense than at 15,000. Value technique works the very best at excessive market valuations,” stated Kirtan Shah, co-founder and CEO, SRE Wealth.
Rushabh Desai, a Mumbai-based mutual fund distributor, added, “There are two sorts of momentum methods—earnings momentum which buys firms delivering constant and excessive earnings with excessive ROE (return on fairness) and value momentum which buys firms based mostly on sure momentum ratios of excessive value returns. Earnings momentum is practised by some schemes resembling Motilal Oswal Flexicap Fund and these may be the core of an MF portfolio. Price momentum, nevertheless, is riskier and shouldn’t be practised for mid- and small-caps. Within massive caps, nevertheless, a value momentum technique is usually a satellite tv for pc technique in your portfolio (10-15% of your allocation).”
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