Mutual funds that focus on momentum investing typically buy stocks or securities that have delivered strong performance recently. This is usually in terms of price movement or returns. Simply put, a momentum fund tends to buy high and then sell the shares at a higher price.
In India, there are a few passive momentum funds. These index funds and exchange-traded funds track momentum indices like Nifty 200 Momentum 30 Index.
Advantages of momentum investing through mutual funds
- Diversification: Mutual funds pool money from investors and invest in a variety of stocks or assets. This reduces the risk associated with any single investment.
- Professional management: Mutual funds are managed by experienced professionals who have access to extensive research and resources, which can be especially important for momentum investing. This requires understanding of market trends and patterns.
- Lower transaction costs: If one invests in a passive momentum fund, then the expenses or costs of managing could be relatively low.
Types of mutual funds
- Equity funds: Invest in a broad range of stocks.
- Sector-specific funds: Focus on particular industries or sectors.
- Index funds: Tracks or replicates indices including Nifty 200 Momentum 30 Index and Nifty Midcap 150 Momentum 50 Index.
Considerations for selecting mutual funds for momentum investing
When selecting mutual funds for momentum investing, investors should consider several factors to help ensure that their investments are aligned with their investment goals and risk tolerance.
- One of the critical considerations is the fund's performance history. It is essential to choose funds with a robust track record. Investors can review the fund's performance over the past few months, quarters, or years to determine if it has consistently outperformed its peers or benchmark.
- It is important to look at the expense ratio of a fund as it impacts your returns directly. Lower expenses can help boost returns over time. On the other hand, higher expenses can eat into your returns.
- Risk management is also an important aspect when selecting mutual funds for momentum investing. Investors should choose funds with a sound risk management strategy in place. This means selecting funds that have a diversified portfolio that can withstand market volatility.
- Investors should also consider their investment goals and time horizon. Investment goals can vary from one investor to another, and it is important to select funds that align with an investor's investment objectives.
Potential drawbacks of momentum investing through mutual funds
- High volatility: Past performance may not necessarily predict future results. Also, momentum investing can be highly volatile.
- Limited control over investment decisions: Investment decisions are made by the mutual fund's management team.
- Potential for underperformance: No investment strategy is foolproof.
Conclusion
Momentum investing with mutual funds can be a valuable strategy for investors. However, investors should do their research, exercise caution and adopt a disciplined approach to investing to minimize risk.