Which one do you want?

It has been raining issue index funds.

Not too long ago, an AMC launched a Nifty 500 Momentum 50 index fund, the primary on this index.

We have already got two momentum index merchandise within the markets. Nifty 200 Momentum 30 and Nifty Midcap 150 Momentum 50 index fund. And the momentum index funds have carried out nicely just lately. Therefore, I’m not shocked to see the AMCs launching completely different variants of momentum merchandise.

When you imagine in momentum investing, which variant of momentum will you choose? You could have atleast 3 decisions of momentum indices now.

On this put up, let’s see how these momentum issue indices have carried out up to now.

Sharing the efficiency abstract right here. Will talk about intimately later.

How does Momentum investing work?

If you’re a momentum investor, you imagine the shares which have risen within the latest previous will carry on rising for some extra time. The intent is to experience onto such shares so long as they hold rising or till yow will discover higher momentum shares. 

That is in stark distinction to how many people take into consideration choosing shares.

Typical funding strategy (or the worth strategy) is Purchase Low and Promote Excessive.

Momentum investing is: Purchase Excessive and Promote Greater.

A momentum index picks the perfect momentum shares from a universe of shares.

As an example, Nifty 200 Momentum 30 index picks 30 shares with highest momentum rating from the universe of Nifty 200.

Nifty Midcap 150 Momentum 50 index picks 50 greatest momentum shares from Nifty Midcap 150.

Equally, Nifty 500 Momentum 50 picks prime 50 momentum shares from Nifty 500.

To assemble a momentum index fund, we want a definition of momentum. And this definition can differ. As an example, NiftyIndices, amongst different issues, considers value efficiency during the last 6 and 12 months. S&P, then again, considers the efficiency of the final 12 months, excluding the latest month. I’ve written about S&P methodology in an earlier put up on momentum investing.

In Nifty momentum indices, the momentum Rating for every inventory (within the base index) relies on latest 6-month and 12-month value return, adjusted for volatility. Adjustment for volatility is essential. This ensures that extra unstable shares get decrease scores. Thus, even in a momentum portfolio, the desire is in the direction of shares which have had a smoother rise. 

Contemplate shares A and B with the next value trajectory.

Inventory A: 100, 110, 120, 125, 130, 145, 165, 180, 200

Inventory B: 100, 150, 120, 175, 140, 195, 160, 230, 200

Whereas each the shares have doubled, Inventory A may have a better momentum rating because it was much less unstable in comparison with inventory B. Therefore, momentum investing isn’t just investing in frothy shares.

I’ll skip the remaining particulars. These particulars are essential too however you’ll be able to learn the detailed methodology in this doc.

Inventory weight is capped at decrease of 5% or 5 instances the burden within the underlying base index.

Issues to bear in mind whereas evaluating Issue Index Merchandise

1. When an element index fund is launched, it’s honest to imagine that the underlying issue index would have carried out fairly nicely within the backtest information. If the issue index has not carried out nicely up to now, it wouldn’t discover many takers on the availability facet (AMCs) or on the demand facet (buyers).
2. Therefore, take such index fund launches and my evaluation on this put up with a pinch of salt. The previous outcomes could be good, in any other case the AMC wouldn’t launch the index fund and I wouldn’t be penning this put up immediately.
3. Previous efficiency (or outperformance) isn’t any assure of future efficiency (outperformance).
4. I’m not very snug with the very excessive alpha (extra return) over the bottom benchmark index. As an example, once I see Nifty Midcap 150 Momentum 50 index has delivered an alpha (extra return) of seven% over Nifty Midcap 150 index over the previous 15 years (ofcourse in backtests), I get a bit sceptical.
5. If an funding technique has carried out nicely in backtests and continues to go nicely going ahead, you’ll be able to count on buyers to pile in some huge cash into that technique. Because the funds move in, the alpha ought to shrink and should even vanish. Therefore, if you need want to put money into an element index product primarily based on previous performace and conviction, be happy to do this however you have to rationalize your expectatations about extra returns. Anticipating an alpha of 7-10% p.a. over the benchmark going ahead is asking for an excessive amount of.
6. There isn’t a assure that such alpha will maintain sooner or later. It’s potential that the issue technique could underperform going ahead. Once more, no certainty about something. Nonetheless, you have to enable this possbility whereas deciding the guess dimension.
7. I wrote a put up just lately the place I in contrast the efficiency of assorted issue indices for the reason that launch in opposition to their respective benchmark universe. An element index fund which did expectionally nicely within the backtests underperformed massively after the launch of the index.
8. No funding technique, irrespective of how good, will do nicely on a regular basis. It is going to undergo durations of underperformance. It’s completely regular. The truth is, such durations of underperformance often is the supply of alpha of any funding technique over the long run. As an example, if fairness markets did higher than financial institution fastened deposits on a regular basis, then everybody would put money into shares and nobody would put money into financial institution fastened deposits. Step by step, the shares costs could be bid excessive sufficient that alpha vanishes.
9. Whenever you put money into any lively fund or an element index fund, you must have the conviction within the fund supervisor or the funding technique. Or else you’ll enter/exit at unsuitable instances. Bear in mind, funding returns may be completely different from investor returns.
10. You don’t put money into the index. You put money into an index fund or an ETF that should purchase and promote shares. As you progress broaden the universe of shares, you even have to understand that smaller shares could not have very excessive liquidity. Whereas the index suppliers attempt to handle such points (by stopping very heavy allocation to smaller shares), we are able to’t fully ignore this issue. Mentioned this facet in my put up on equal weight indices.

I’ll current the efficiency of assorted momentum indices and go away all the pieces to your judgement.

I evaluate the month-to-month information (and never day by day information) of Value index. From April 1, 2005 to August 31, 2024.

Nifty Momentum Indices: Efficiency Abstract

Nifty Momentum Indices: Calender 12 months Returns

Momentum Indices: Rolling Returns

Momentum indices have carried out fairly nicely on the rolling returns entrance too. This isn’t stunning given the huge outperformance within the CAGR over the long run.

Momentum Indices: Volatility and Most Drawdown

Alongside anticipated strains. You’d count on momentum indices to be extra unstable and present greater drawdowns than Nifty 50.

Momentum Indices: Efficiency throughout numerous market phases

I in contrast the efficiency of assorted momentum indices over completely different market phases. Throughout numerous phases of Nifty returns.

Right here too, the efficiency of momentum indices (keep in mind most of this information is back-fitted) is kind of spectacular.  Apart from minor underperformance when Nifty has returned lower than 10%, the momentum indices have carried out higher throughout all different market phases.

Which Momentum index do you have to put money into?

Earlier than you get there, you have to first resolve whether or not you have to put money into any momentum index. Previous efficiency seems to be nice however there isn’t a assure that this efficiency will maintain. Any technique goes by durations of underperformance or outperformance. You could have conviction to stay with the technique throughout poor phases.

Do you imagine in momentum investing?

When you don’t, then you have to not put money into momentum index funds.

When you do, then you have to resolve how a lot to allocate to momentum technique. Don’t get swayed by the previous efficiency proven on this put up and put all of your eggs in a single basket. Assemble your portfolio properly.

Upon getting determined the allocation, you have to choose a momentum index fund or ETF. You could have 3 momentum indices and a number of funds monitoring these indices. Which index to decide on? I go away that call to your funding acumen and judgement.

Personally, earlier than choosing an index to speculate (from a set of comparable funds/methods), I would like to see how these indices carried out throughout antagonistic market phases. Would like the one which retains me rather less apprehensive throughout dangerous market phases. Helps me in sustaining funding self-discipline and that’s additionally the important thing to funding success.

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Disclaimer: Registration granted by SEBI, membership of BASL, and certification from NISM under no circumstances assure efficiency of the middleman or present any assurance of returns to buyers. Funding in securities market is topic to market dangers. Learn all of the associated paperwork fastidiously earlier than investing.

This put up is for schooling goal alone and is NOT funding recommendation. This isn’t a suggestion to speculate or NOT put money into any product. The securities, devices, or indices quoted are for illustration solely and should not recommendatory. My views could also be biased, and I could select to not concentrate on points that you simply think about essential. Your monetary targets could also be completely different. You could have a unique danger profile. You could be in a unique life stage than I’m in. Therefore, you have to NOT base your funding selections primarily based on my writings. There isn’t a one-size-fits-all answer in investments. What could also be a superb funding for sure buyers could NOT be good for others. And vice versa. Due to this fact, learn and perceive the product phrases and situations and think about your danger profile, necessities, and suitability earlier than investing in any funding product or following an funding strategy.