Active momentum mutual funds outperform Nifty, passive peers

Mumbai: Actively managed momentum funds have outperformed the Nifty and their passive counterparts over the past year, as their algorithm-driven stock selection and shorter holding periods helped navigate a volatile market. Bigger bets on outperforming mid- and small-caps also contributed to the gains.

The Nifty 200 Momentum 30 Index, which has an allocation of 68% to large-cap stocks and 32% to mid-caps, declined 2.1% in the past year. By comparison, top performing Motilal Oswal Active Momentum Fund, with 24% in large caps, 19% in mid-caps and 57% in small caps, returned 22%.

Union Active Momentum Fund, which returned 11.5%, had an allocation of 17% to large caps, 23% to mid-caps and 60% to small caps. The Nifty 50 declined 3.44%, Nifty Midcap 150 gained 6.64%, and the Nifty Smallcap 250 gained 2.15% in this period. The scope for market-beating returns has prompted ICICI Prudential, Kotak Mahindra and NJ Mutual Fund to launch active momentum funds lately.

"Higher allocation to mid and small caps, and ability to churn quickly has helped active momentum funds outperform themarket and passive momentum funds," says Nikhil Gupta, founder of Sage Capital, a mutual fund distributor.

Active momentum funds use quantitative models to shuffle their stock portfolios based on strengthening price trends and weakening momentum. This allows them to respond faster to changing market conditions. "If a stock's momentum weakens, if its relative ranking slips, or if a better opportunity emerges, we reduce or exit the position," says Shirish Guthe, research analyst & fund manager, Nippon India Mutual Fund.

Momentum investing requires fund managers to quickly enter and exit positions as and when momentum changes. “An active momentum fund has the additional advantage of fund manager research and judgement with the freedom to decide which stocks to own in what percentage,” says Chetan Nandani, founder, Prime Care Investments, a mutual fund distributor. Fund managers said manual intervention helps in better risk management.

“We manage risk with tight control on liquidity, which avoids illiquid counters. There is manual intervention in scenarios where any external event could hamper the value creation of any of the holdings,” says Gaurav Chopra, fund manager—Equity at Union Asset Management.