Is Momentum Investing The Right Fit For You?

Momentum investing has become increasingly popular as investors look for tactical strategies to increase returns. But is this strategy for you? Before investing in a momentum mutual fund, it is important to know the characteristics, pros, and cons of this strategy to ensure that it is the right option for your requirements.

Momentum is best for those who embrace the cyclical nature of the market — periods of solid outperformance followed by periods of consolidation or lagging. Investors must not mingle momentum with speculation. Although both can follow trends, momentum is fact-based and systematic, whereas speculation tends to be emotional and unstructured.

Momentum is for the informed and engaged

Momentum investing necessitates ongoing monitoring, prompt decision-making, and emotional control. Although mutual funds facilitate simplified execution, investors must still synchronise their risk tolerance and time horizon prior to investing in momentum strategies.

New investors or those who prefer steady returns might find momentum's volatility unnerving. On the other hand, more seasoned investors, looking for alpha, might value its tactical versatility. Momentum investment also demands emotional detachment—shunning attachment to certain stocks or sectors that no longer qualify under the trend criteria.

How mutual funds simplify execution

For Indian investors, most of whom cannot monitor and implement momentum strategies on their own, mutual funds do this through their proprietary models. Mutual funds remove emotion from the mix and provide investors access to factor-based investment without necessitating continuous decision-making.

A number of AMCs in India now launch momentum-based NFOs or specialised factor funds. Remember, reading fund fact sheets, performance track records, and methodology is important before investing. Further, while clean execution is facilitated by technology, investors must be aware of fund philosophy and past drawdown scenarios.

Risks and tax considerations

Momentum funds are characterized by higher churn, meaning they frequently buy and sell stocks to capitalize on short-term trends. This increased trading activity has a direct impact on expense ratios, as the fund incurs more transaction costs. Furthermore, in India, short-term capital gains (STCG) tax are applicable if equity investments are redeemed within a year. Consequently, investors in momentum funds must account for post-tax returns, as the fund's frequent trading can lead to STCG on realized profits.

It is also best not to jump in during peaks of the market without a definite time horizon. SIPs are a more suitable approach for first-time investors coming into a momentum strategy. Avoid overconcentration as well—momentum investing is most useful as a satellite position, not as a substitute for core equity funds.

Ideal portfolio allocation

If you are a conservative investor who prioritises stability and income, momentum investing is not for you. However, if you are willing to accept some volatility and want tactical alpha, holding a portion of your portfolio in a momentum fund is reasonable. Investors might even look at combining momentum funds with other factor-based or smart beta offerings to lower risk exposure and enhance diversification.

Timing, quality of funds, and individual objectives must all be taken into account before investing.

Momentum investing can be a useful complement to your portfolio—but only if it fits your objectives and risk tolerance. With mutual funds providing disciplined and research-driven means of accessing market trends, even individual investors can approach this new strategy with confidence and caution—so long as they manage expectations and stick to their guns.

When used and interpreted properly, momentum investing is a strategy supported by market behaviour and academic research.

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