Within the smart beta universe, there are various factor-based offerings. Momentum is one such factor wherein, experts say, savvy investors aim to capitalize on the continuance of existing trends in the market.
Chintan Haria, Head – Of Product Development and Strategy, ICICI Prudential AMC, explains, “This involves taking advantage of market volatility by taking short-term positions in stocks going up and selling them as soon as they show signs of going down.” Thereafter, the investor then moves the capital to new positions.
In effect, Haria says, “momentum investing is about sailing up the crest of a wave, only to jump to the next wave before the first wave crashes down again. However, in doing so, the strategy follows a certain strict set of rules based on technical indicators, risk management rules to address volatility.”
For an investor looking to add the momentum-based offering to their portfolio, industry experts say can consider investing in the Nifty 200 Momentum 30 Index. There are both index funds and an ETF available based on this index. Haria points out, “The underlying 30 stocks of the index are chosen from the Nifty 200 index universe. As a part of the selection criteria, a normalized momentum score is calculated for each of the 200 stocks of the Nifty 200 Index. Based on the score, 30 stocks are shortlisted.”
Stocks weights are assigned basis of a combination of the stock’s momentum score and its free-float market capitalization. “As a means to keep up the index with the changing market conditions, the index is rebalanced on a semi-annual basis. Currently, the index is overweight on metals, consumer services, chemicals, power and capital goods,” explains Haria.
He further adds, “Over longer time frames, the Nifty 200 momentum 30 indexes has outperformed the benchmark Nifty 200 and Nifty 50 index by 200-300 basis points. Out of the last 10 years, the momentum total return index has outperformed for eight years. In the last ten years, the Nifty 200 momentum 30 total return index delivered a return of 19.8 per cent on a CAGR basis.”
The risk-adjusted return of the momentum index is 1.1 in the last decade, while the Nifty 50 was 0.8, which experts say, shows superior risk-adjusted for the momentum index.