By Chintan Haria
As one of the fastest-growing nations in the world, the Indian economy has been on a steady footing. The third quarter GDP growth was a staggering 8.4% and is expected to be 7.6% for 2023-24, which is among the best in the world. The RBI and various international agencies predict 7% growth for the current fiscal year. The growth momentum seems to be in India’s favor.
Project this phenomenon onto the equity markets and India is a momentum player in the global markets. Similarly, we have stocks that have seen a continuous price uptrend in the past and some are likely to continue in the same trajectory.
One of the ways to play the momentum strategy is via factor-based or smart-beta investing which has momentum as the key filter in selecting stocks. The idea behind momentum investing is that a set of winning stocks would continue doing well for the foreseeable future. This pack of stocks will vary over time but exposure to the right momentum stocks can be very rewarding for the overall portfolio. One of the easiest ways to invest in momentum names is via investing in the Nifty 200 Momentum 30 index. Basis this index, both ETF and index fund routes are available to investors.
Gaining from Price Trend
Broadly, momentum is the phenomenon where the trends in stock price movements are likely to persist. So, stocks that have done well recently are likely to continue outperforming and vice versa. Factors such as 6-month and 12-month price movements of stocks, adjusted for volatility, are considered for deciding the momentum pattern.
Therefore, momentum investing looks to benefit from market volatility by taking short-term positions in stocks going up and exiting them as soon as there are signs of weakening price trends. The investor then moves to another set of stocks showing momentum.
Choosing The Index for Momentum Play
The Nifty 200 Momentum 30 index is a solid option for investors to capitalize on the momentum factor, that too passively. The index consists of 30 stocks chosen from the Nifty 200 universe.
Now, the Nifty 200 has 100 large-cap and 100 midcap stocks, an excellent diversified mix of companies. Only stocks have at least a one-year listing history and are available for trading in the future and options segments are eligible for inclusion in the momentum index. The stocks chosen are based on the normalized momentum score. This score is obtained by mixing 50% of the 12-month price return of stock with 50% of the 6-month price return and is adjusted for volatility. From the list of top 30 stocks with better-normalized momentum scores are selected.
The weightage ceiling is kept at a lower end of 5% or 5x free-float market capitalization of the stock. The index constituents are reviewed in June and December every year.
Scoring Over Plain Benchmark
Because the set of stocks making the benchmark keeps getting shuffled periodically, the chances of gaining from a winning pack increase. The momentum index, for example, saw increased weightage to IT and healthcare stocks in late 2020 when they were doing extremely well, and to financial services in late 2022 when this segment outperformed. The Nifty 200 Momentum 30 index has done much better than the Nifty 200 index over the short, medium, and long-term periods.
Over three and five-year periods, the momentum index has delivered 7-10 percentage points more than the Nifty 200.
The Nifty 200 Momentum 30 is also lower on valuations as measured by the price-earnings multiple and has a higher dividend yield than the Nifty 200 index.
Investors can choose the ETF route for investing in the Nifty 200 Momentum 30 index. Those without a demat account can invest in this strategy via the index fund route.
(Disclaimer: Chintan Haria is the Principal-Principal Investment Strategy at ICICI Prudential AMC. Views, recommendations, opinions expressed are personal and do not reflect the official position or policy of Financial Express Online. Readers are advised to consult qualified financial advisors before making any investment decisions. Reproducing this content without permission is prohibited.)
