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Create wealth with momentum investment strategy

Henil Shah
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Create wealth with momentum investment strategy

Momentum investing is nothing but an investment strategy that seeks to capitalise on the continuance of existing market trends. This investment strategy is not new to us as S&P BSE already has a momentum index that was launched in December 2015. It is now that we have a dedicated fund (UTI Nifty 200 Momentum 30 Index Fund) through which, we can take such exposure. This fund was launched soon after the National Stock Exchange (NSE) launched its Nifty 200 Momentum 30 Index. 

 

The aim of this index is to track the performance of the top 30 companies from the Nifty 200 index that are selected based on their normalised momentum score. The normalised momentum score for each company is derived based on its 6-month and 12-month risk-adjusted price return. Stock weights are decided based on the individual stock’s normalised momentum score and its free-float market capitalisation. Further, this index is re-balanced quarterly. However, the momentum strategy adopted by the S&P BSE Momentum Index is quite different. Instead of 12-month and 6-month risk-adjusted price returns, it only goes with 12-month risk-adjusted price returns. However, if the 12-month history is not available, then it takes 9-month risk-adjusted price returns. Therefore, there are high chances that the results of both indices would be quite different. 

 

In order to understand how the strategy is, let us look at its performance. Although for S&P BSE Momentum Index and Nifty 200 Momentum 30 Index, the base price is available from April 2005. However, it is prudent not to judge the performance of the indices based on their base value. Therefore, we would be looking at the performance of the S&P BSE Momentum Index.

 

 

As we can see in the above graph, the long-term momentum investment strategy performs way better than S&P BSE Sensex Total Returns Index (TRI), S&P BSE 500 TRI, S&P BSE 150 Mid-Cap TRI and S&P BSE 250 Small-Cap TRI. Now, let us see how it performs in terms of risk. 

 

 

As we can see, in terms of risk as measured by the maximum drawdown, the momentum index did well. In fact, among the other indices, it had the lowest maximum drawdown. A maximum drawdown is nothing but a measure that helps us to understand the actual pain of investment made. Therefore, we can say that momentum investing does have the potential to create wealth in the long-term. However, emotions are something that you need to keep at bay while investing this way, which is the actual problem of investment failures. Investment failure occurs not because of the markets but due to the fact that your emotions are in play.

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