From -2% to 24% in a year: What makes momentum fund returns vary so sharply

Chase recent winners, drop the laggards. Momentum investing is a time-proven strategy that seems simplistic in its premise. It eschews all the drama surrounding valuations, growth, earnings visibility—variables that form the core pillars of fundamentals-led equity investing. In momentum, price strength is everything.

Yet, as investors in actively managed momentum funds have found, execution drives outcomes. The banner only signifies intent. The engine behind the banner determines if intent translates into superior outcomes.

Several active momentum funds have delivered stellar returns


Index-based momentum funds have suffered amid an extended lull in the market.

Varying outcomes

Amid an extended lull in the broader markets, momentum funds have shown highly disparate outcomes. This divergence is evident in momentum strategies across both equity mutual funds (MFs) and portfolio management services (PMSes).

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As per data from Ace MF as of 31 July, active momentum-driven funds in the MF basket have averaged a 9.2% return over the past year, even as the Nifty500 total return index (TRI) gained 3.4%. Meanwhile, index-based momentum funds clocked 1.8% during this period. However, there is a range of outcomes within this universe. Motilal Oswal Active Momentum Fund has delivered a stunning 23.9% return, while Axis Momentum Fund and Samco Active Momentum have lagged with -2.14% and 0.5%, respectively. Nippon India Active Momentum Fund and Union Active Momentum Fund have fetched 13.3% and 10.5%, respectively, while ICICI Prudential Active Momentum Fund has gained 9%.

Momentum-based PMS offerings have also beaten their index counterparts, averaging 5.6% over the past one year. But even here, outcomes are dispersed, from BB Micro-Mega PMS’s 20.1% to Agreya Momentum PMS’s -3.3%, as per data from PMS Bazaar. Qode Tactical PMS (14.9%) is the other notable performer in this basket.

The broader performance suggests a weak environment is not necessarily a hurdle for pursuing momentum. Active momentum funds can still flourish by identifying shifts in sector leadership and quickly rotating out of positions exhibiting declining price strength.

In a range-bound market, the outcome for momentum strategies will depend less on the headline index and more on the nature of the movement underneath it, observes Aditya Agarwal, Co-Founder, Wealthy. in. “If the broader market remains flat but leadership continues to shift towards identifiable sectors and stocks, active momentum funds can still find opportunities by exiting weakening trends and reallocating to emerging leaders. But if the market repeatedly reverses direction without allowing any trend to persist, momentum models can face a series of false signals—buying a stock after it has strengthened, only for the trend to reverse soon afterwards.”

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One goal, many roads

This is where individual models driving the funds come to the fore. Even as all momentum funds seek to capture price signals, they take different paths in this pursuit. Proprietary models vary in how they capture price trends (look-back period), the frequency of rebalancing and supplementary overlaying filters, among other things.

“Momentum models can differ at the first stage itself: how momentum is defined,” points out Agarwal. One model may rely primarily on six- and twelve-month price returns, while another may examine shorter and longer periods simultaneously. Some models adjust price performance for volatility, while others combine price momentum with earnings revisions, growth indicators, liquidity, quality or valuation filters.

For instance, Motilal Oswal’s Active Momentum Fund applies its QGLP (quality, growth, longevity, price) framework, along with governance filters and monthly rebalancing, to mitigate risk and adapt swiftly to shifting market conditions. ICICI Prudential Active Momentum Fund complements price momentum with earnings momentum (consistency in beating estimates and earnings revisions) to identify more persistent momentum trends.

This is distinct from how index-driven momentum funds are built. Manuj Jain, Co-Founder, ValueMetrics Technologies, remarks, “The Nifty Momentum indices primarily use price momentum adjusted for volatility to assess whether a stock is exhibiting sustained momentum. Active momentum strategies can go beyond this and incorporate parameters such as earn ings trajectory, earnings revisions and other fundamental indicators.”

Momentum is not just about constantly hitting balls out of the park. When the market environment turns sour, defences built into momentum strategies play an important role. Many active momentum strategies cut equity positions in favour of cash or fixed income when the trends are not supportive. Samco Active Momentum Fund actively hedges positions in periods of ‘anti-momentum’, cutting net equity exposure to as low as 0%. Capitalmind Adaptive Momentum PMS takes comfort in gold and bond ETFs during downturns apart from cash when opportunities run dry.

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The eligible investment universe can also produce very different portfolios, Agarwal notes. A model operating within the Nifty 200 will behave differently from one that can invest across the top 1,000 listed companies. “A wider universe may identify momentum opportunities in mid- and small-cap stocks earlier, but it can also introduce greater liquidity and execution risk,” he says.

Manish Kothari, CEO and Co-Founder, ZFunds, adds that sophisticated models also incorporate macro momentum factors such as commodity price trends, foreign and domestic institutional investors flow data, and currency movements layered alongside conventional technical indicators. “This multi-factor, multi-timeframe approach is what differentiates one active momentum strategy from another, and explains the dispersion in returns across fund houses despite all being ‘momentum’ strategies at a headline level,” he asserts.

In PMS strategies, these differences can be even more pronounced because portfolios may be more concentrated and managers may rebalance faster or use more flexible risk controls, according to Agarwal.

Beyond the label

The distinct frameworks and resulting divergent outcomes suggest the ‘momentum’ label is merely indicative. There is a lot going on underneath the different funds. Both risk and return experiences could differ with two distinct momentum funds. This necessitates that investors understand the individual model behind the fund.

“Given the number of moving parts, investors should certainly look beyond the label of ‘momentum’ and understand the underlying investment model and market cap mix. They should examine the parameters used, look-back periods, how frequently the portfolio is rebalanced and, importantly, the market cap segments the strategy targets,” says Jain. Agarwal adds, “Investors should be able to understand its broad architecture: what the model measures, the universe it covers, how frequently it changes the portfolio, what risk controls are applied and how much discretion remains with the manager.”

Passive: Simpler, but rigid

Passively managed momentum funds have fewer nuts and bolts than their actively man aged counterparts. These strictly follow a set of rules regardless of prevailing market circumstances. “Passive momentum strategies are simpler, rules-based and primarily driven by price signals with limited manager discretion,” remarks ZFunds’ Kothari.

This simplicity allows investors to easily identify the fund’s specific workings. “An investor can understand the underlying index’s selection rules, weighting method and rebalancing schedule before investing,” observes Agarwal of Wealthy.in.

Besides, active momentum strategies in the country have a relatively short track record compared to passive momentum funds and indices. Kothari points out, “Most active momentum products gained real traction only around two years ago, and since then, markets have largely been choppy. This means we haven’t yet seen these active models tested through a genuine multi-year trending market.” He reckons passive momentum funds may be the more prudent choice for most investors due to their simplicity, transparency and lower costs.

However, a simpler construct may not translate into better outcomes, as relative performance indicates. Index-driven momentum funds adopt longer look-back periods and slower portfolio rebalancing.

In other words, their portfolios reflect price trends captured over longer time frames and get reset after longer intervals. The longer look-back period ignores more recent price trends.

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This, along with slower rebalancing, exposes the portfolio to ‘signal decay’—the risk that it will not be able to exit stocks before price strength dissipates or a correction becomes acute. Actively managed momentum strategies of mutual funds and PMSes are typically run more fluidly, as outlined earlier.

Agarwal asserts, “Active momentum funds can respond more quickly, incorporate earnings and liquidity information and apply discretionary risk controls. In return, investors accept greater model risk, fund manager risk, turnover and costs.”

Jain of ValueMetrics maintains that passive momentum funds offer greater transparency and a more standardised way of accessing the momentum factor, but they are not necessarily better. “The choice ultimately depends on whether an investor wants pure, rules-based exposure to the momentum factor or is comfortable taking model risk in pursuit of potentially differentiated outcomes through an active approach.”

Agarwal reckons that the choice should not be dictated by returns. Passive momentum may be more suitable for someone prioritising transparency, predictability and lower costs. Active momentum may be appropriate when the investor understands the process and values faster portfolio adaptation and active downside management.

A vast range of outcomes is visible in active momentum funds

What next for momentum?

The momentum factor has not had it easy in the last two years. It remains a slave to market trends. A protracted time correction is not an ideal environment for this pursuit. “Momentum needs persistent trends to work; sideways markets are its weakest environment, as frequent trend reversals also drive up portfolio churn and transaction costs within these strategies,” Kothari asserts.

Coming on the back of a multi-year market rally that gave momentum seekers wings, the modest performance has tested the resolve of many. But no strategy can escape the clutches of gravity. Trying to time momentum is also futile.

“Momentum is a well-established investment factor, but like any factor, it goes through phases of outperformance and underperformance. Hence, investors should look at momentum as a long-term factor allocation rather than a strategy to time the market,” Jain insists. Kothari maintains momentum should be sized as a satellite allocation rather than a core holding. Investors should be prepared for uneven outcomes and possible periods of underperformance until a clearer trend emerges.