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While Momentum Funds were once posting returns of over 100% compared to a Nifty 50 Index Fund, they have now declined as one of the worst funds and are down over 20% in value within a 3-6 month span in this recent market downturn.
This has been attributed by analysts to the volatility associated with momentous investing, which capitalizes on bullish patterns during a market peak. Market sensitive stocks are known to cycle heavily, meaning within bullish patterns, growth happens rapidly.
The funds that have widely suffered in this downturn include 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. These funds have dropped over 27% within the last 3 months.
Other funds such as Tata Nifty MidCap 150 Momentum 50 Index Fund and Edelweiss Nifty MidCap 150 Momentum 50 Index, have also dropped over 24% in value. Other funds ranging from 13-23% in value have also contributed to associated losses.
All funds within this category quartersize and invest in equities that exhibit strong recent price growth, and they tend to lag after the markets correct. Their performance closely follows the market. There is likely to be recovery – perhaps in the next quarter or the second half of the year – which may go a long way in restoring investor confidence.
Independent analyst Deepak Jasani commented, noting that “momentum investing works best in a bull phase, especially during the broad-based rally of blue-chip stocks.”
The portfolio construction in these funds is more technical than fundamental, and when midcap indices and individual stocks decline, the fund managers are caught in a loss situation. In the first place, one would want to sit through a drawdown waiting for a recovery. At the same time, you might need to accept the fact that you're going to have to take the loss and then try to reset new positions altogether.
These parts of the market are in decline along with everything else, and there is very little stock selection, so the suggests experts.
While certain portfolios might do well during cyclical upswings, Karkera noted that their inability to hedge makes them vulnerable during bearish periods. Head of Research at Fisdom, Nirav Karkera, suggested that a lot of momentum stocks are sensitive to market cycles, and so most even beta portfolios do not protect during a downfall.
According to specialists, passively managed momentum funds require more time to adjust, whereas actively managed funds are adjusted in a timely manner. The recent drop in the market has not impacted actively managed funds as severely as passively managed funds.
“Rupesh Bhansali”, now, the head of mutual funds at GEPL Capital, emphasizes that actively managed momentum funds are relatively riskier in nature than their passively managed counterparts. These funds are only recommended to well seasoned investors who are looking to invest for longer than a year, while anyone looking for shorter terms should do their best to avoid these funds.
Moreover, specialists claim that investors interested in systematically investing without a manager and still getting the lowest possible fees, would benefit from these passively managed index funds with a minimum five year timeframe. In greatly bullish markets, these funds can prove helpful to investors and are known to help ‘scoop up’ units of these funds during corrective recession periods.
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