Momentum Funds: From Market Leaders to Laggards – What Went Wrong?
Momentum funds, once celebrated for delivering more than twice the returns of the Nifty 50 Index Fund, are now facing a sharp downturn. Over the past three to six months, nearly all the funds have plunged by over 20%, turning into some of the worst-performing investment options.
The Rise and Fall of the Funds
Momentum investing follows a simple principle: invest in stocks that have been performing well and continue riding the trend. These funds thrive in bullish market conditions when stock prices continue to rise. However, when the market cycle shifts, these funds can suffer significant losses, as seen in the latest correction.
Several prominent momentum funds have faced steep declines in the last three months:
| Fund Name | Percentage Drop (Last 3 Months) |
|---|---|
| Bandhan Nifty 500 Momentum 50 Index | -27% |
| Motilal Oswal Nifty 500 Momentum 50 ETF | -27% |
| Nippon India Nifty 500 Momentum 50 Index | -27% |
| Motilal Oswal Nifty 500 Momentum 50 | -27% |
| Tata Nifty MidCap 150 Momentum 50 Index Fund | -24% |
| Edelweiss Nifty MidCap 150 Momentum 50 Index | -24% |
| Kotak Nifty MidCap 150 Momentum 50 Index | -24% |
| Other Momentum Funds | -13% to -23% |
This funds primarily focus on stocks that are highly sensitive to market cycles. During a strong uptrend, they can generate exceptional returns, but during market downturns, they struggle to find stocks with sustained price momentum.
Why Are the Funds Underperforming?
- Market Cycle Shift – Momentum investing flourishes in a bullish environment, but in a falling market, the strategy backfires. As stock trends reverse, momentum funds fail to sustain gains.
- High Beta Exposure – These funds typically hold stocks with high beta, meaning they are more volatile and react sharply to market corrections. This exposure has amplified losses during the recent downturn.
- Slow Rebalancing in Passive Funds – Passively managed the funds take longer to adjust to changing market conditions, increasing their vulnerability. In contrast, actively managed momentum funds, which rebalance more frequently, have seen slightly lower losses.
- Limited Downside Protection – Since momentum funds are “long-only” strategies, they lack the flexibility to hedge against market downturns, making them particularly risky during corrections.
What Experts Are Saying
Deepak Jasani, an independent analyst, highlights that momentum investing works best when blue-chip stocks are rallying. When midcap indices weaken, fund managers face losses as stock selection is largely based on technical signals rather than fundamental strength.
Nirav Karkera, Head of Research at Fisdom, notes that many momentum funds have inadvertently accumulated stocks with high aggregate beta, making them extremely sensitive to market fluctuations.
Rupesh Bhansali, Head of Mutual Funds at GEPL Capital, warns that momentum funds inherently carry high risk. Investors with a short-term outlook should avoid them, while those with a longer investment horizon (at least five years) may consider them during bullish phases.
Should You Invest in Momentum Funds?
Momentum funds can be rewarding in a structurally strong bull market. However, they come with high volatility and require patience. Investors should keep the following in mind:
- Long-Term Horizon – Momentum funds are not suitable for short-term traders but may be beneficial for long-term investors who can withstand volatility.
- Actively vs. Passively Managed Funds – Actively managed funds may provide better risk management than passive ones.
- Market Timing – Entering during corrections can be a good strategy, but investors must be prepared for fluctuations.
- Diversification – Relying solely on momentum funds can be risky. A well-balanced portfolio with diversified investments can help mitigate downside risks.
Q&A: Understanding the Momentum Fund Meltdown
- Why are momentum funds falling sharply?
Momentum funds invest in stocks that are trending upwards. When market sentiment reverses, these stocks correct rapidly, leading to heavy losses in the fund. - Are all momentum funds affected equally?
No, actively managed momentum funds have fallen less than passively managed ones because they rebalance more frequently to adapt to market changes. - Should I exit my momentum fund investments?
If you have a long-term view (5+ years), staying invested might be a good strategy. However, if you have a short-term investment goal, it might be wise to reconsider. - Do momentum funds always underperform in bearish markets?
Yes, since they rely on stock price trends continuing upwards. When markets decline, momentum stocks tend to fall sharply. - Can momentum funds recover?
Yes, if the market rebounds in the next quarter or later in the year, momentum funds could regain lost ground.
Final Thoughts
Momentum funds have had a rough patch, but history suggests that they tend to perform well in strong bull markets. Investors should weigh their risk appetite and investment horizon before making decisions. Those looking for lower-cost, systematic investing without fund manager intervention might prefer passively managed momentum index funds with a long-term view. However, high-risk investors may still find opportunities in actively managed funds that adjust to market conditions more swiftly.
Would you invest in momentum funds despite their recent decline? Share your thoughts in the comments below! 🚀
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Disclaimer: This blog post is for informational purposes only and should not be considered financial advice. Investors should conduct thorough research and consult with a qualified financial advisor before making any investment decisions.