Are momentum funds for ordinary investors?

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Momentum mutual funds are rapidly becoming popular among the emerging mutual fund schemes in India. These funds have outperformed regular index funds in terms of performance in recent years. Investors’ interest in them is growing rapidly. In such a case, today we tell you what momentum mutual funds are, types, how they work, and for which investors are they suitable.

Momentum mutual funds are a special type of mutual fund that invests in the share market with a strategy called ‘Momentum Investing’. The purpose of Momentum Investing is to profit from stocks that are performing well and are expected to continue doing so.

Now, how do these? Essentially, in momentum mutual funds, the fund manager invests in stocks whose prices are rising, following a strategy. Fund managers adopt a momentum strategy with the assumption that stocks that have previously performed better in the market will continue to rise in the future until they reach their peak or slow down due to negative indicators. This way, fund managers book profits at a predetermined price.

It is also important to know how many types of momentum mutual funds are there.

There are two types of funds: Actively Managed Mutual Funds and Passively Managed Mutual Funds. Active momentum mutual funds are managed by fund managers who invest in a stock based on the upward trend. For this, they research to identify stocks with the potential to rise. Since active momentum mutual funds require active management, their cost is higher compared to passive momentum funds.

On the other hand, passively managed momentum funds follow a momentum index, replicating it, such as the Nifty200 Momentum 30 Index. Passive momentum funds invest in stocks that are part of the index. Passive momentum funds have a lower expense ratio.

Regarding taxation, Momentum funds are taxed like equity funds. If you redeem before 1 year, the profit will be taxed at 15%. If you redeem the investment after 1 year, profit up to 1 lakh rupees per financial year is tax-free. Any returns above that will be taxed at 10%.

Talking about returns and popular funds, in the active momentum fund category, Quant momentum fund and Samco Active momentum fund were launched last year in 2023. Among passive momentum mutual funds, Edelweiss Nifty Midcap150 Momentum 50 Index Fund, Tata Nifty Midcap 150 Momentum 50 Index Fund, and Aditya Birla SL Nifty 200 Momentum 30 ETF have given a compounded annual growth return of 72.90%, 72.39%, and 71.34% respectively in one year till May 4, 2024.

Momentum Mutual Funds CAGR Returns (%)
Scheme Name	1 Year	2 Year	3 Year
Passive Momentum Fund
Edelweiss Nifty Midcap150 Momentum 50 Index Fund	72.90
Tata Nifty Midcap 150 Momentum 50 Index Fund	72.39
Aditya Birla SL Nifty 200 Momentum 30 ETF	71.34
Motilal Oswal Nifty 200 Momentum 30 ETF	71.09	31.80
ICICI Pru Nifty 200 Momentum 30 ETF	70.81
HDFC NIFTY200 Momentum 30 ETF	70.77
UTI Nifty200 Momentum 30 Index Fund	70.58	31.54	26.18
Motilal Oswal Nifty 200 Momentum 30 Index Fund	69.75	31.07
Bandhan Nifty200 Momentum 30 Index Fund	69.09
ICICI Pru Nifty 200 Momentum 30 Index Fund	68.83
Active Momentum Fund
Quant Momentum Fund-Reg(G)	NA	NA	NA
Samco Active Momentum Fund-Reg(G)	NA	NA	NA
Source: Ace mutual fund; Returns as on 4th May, 2024

 

Recently, on May 4, 2024, entering the growing market of Momentum mutual funds, Mirae Asset Mutual Fund launched the country’s first mutual fund scheme in the Mid and Smallcap segment. This portfolio will have 50 Midcap and 50 Smallcap stocks, named the Mirae Asset Nifty MidSmallcap400 Momentum Quality 100 ETF.

So, should you invest in Momentum Funds? If you are an aggressive investor and can withstand market ups and downs, you can include momentum funds along with other active or passive funds such as large-cap funds, thematic funds, or small-cap funds. According to experts, investors should not invest more than 15% of their portfolio in momentum funds. They should invest money in these schemes if they have a high-risk appetite.

It can be concluded that Momentum Mutual Funds fall into the high-risk category because there is no guarantee that stocks performing exceptionally well will continue to do so. Additionally, many Momentum Funds are currently in their initial stages, so their performance remains to be seen, and it may be difficult to compare them. On the positive side, these funds have the highest potential to generate significant profits. If you want to invest, seek the help of a financial advisor for more clarity.