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Momentum Funds, once delivering more than double the returns compared to Nifty 50 Index Fund, are now among the worst performers in this leg of the market downturn, with nearly all of them seeing a steep decline of more than 20 percent over three and six-month period.
Analysts are attributing this underperformance to the nature of momentum investing, which thrives in bullish cycles when stocks are rallying. Momentum funds typically invest in stocks that are sensitive to market cycles.
Nearly 20 momentum funds have suffered substantial losses, including Bandhan Nifty 500 Momentum 50 Index, Motilal Oswal Nifty 500 Momentum 50 ETF, Nippon India Nifty 500 Momentum 50 Index, and Motilal Oswal Nifty 500 Momentum 50, which have plunged over 27 percent in the last three months.
Tata Nifty MidCap 150 Momentum 50 Index Fund, Edelweiss Nifty MidCap 150 Momentum 50 Index, and Kotak Nifty MidCap 150 Momentum 50 Index have fallen over 24 percent. Other momentum funds recorded losses ranging from 13-23 percent.
Funds of this category typically chase stocks with strong recent price momentum, but once markets correct, they often struggle. The performance closely mirrors broader market trends, and a potential recovery — possibly in the next quarter or the second half of the year — could help restore investor confidence.
Independent analyst Deepak Jasani said momentum investing thrives in a bullish phase, particularly when broader blue-chip stocks across the market rally.
Stock selection in these funds is more technical than fundamental, and as midcap indices and individual stocks weaken, fund managers are at a risk of losses. Initially, one may wait for a rebound, but they may also be forced to exit at a loss and enter new positions.
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In a falling market, momentum is short-lived, making it difficult to find suitable stocks, said experts.
Nirav Karkera, Head of Research at Fisdom said most momentum funds have inadvertently invested in stocks that elevated their aggregate beta, making them highly sensitive to market cycles. While such portfolios typically outperform during cyclical upswings, their long-only nature limits downside protection, making them vulnerable in bearish phases.
Experts said passively managed momentum funds take time to adjust to market dynamics. However, actively managed momentum funds are rebalanced more frequently. In the recent fall, actively managed momentum funds have fallen less compared to passively managed ones.
Rupesh Bhansali, Head of Mutual Funds at GEPL Capital, cautions that momentum funds inherently carry high risk. Investors should consider these funds only with a long-term horizon of more than a year, while those with a shorter time-frame should avoid them.
Experts further say that investors keen on low costs and systematic momentum investing with no fund manager risks should stick to passively managed index funds with five years view. In the long term, these funds can reward investors in a structurally bull market. Corrective phases can be used to accumulate units of these schemes, experts added.
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