Momentum investors subscribe to the notion that once a trend begins, be it upward or downward, it tends to continue for some time. Their approach entails buying assets on the upswing and selling those on the downswing, aiming to leverage and gain from these trends.
Chintan Haria, Principal—investment Strategy, ICICI Prudential AMC, in an interview withBT Money Today, says momentum investing can be highly effective during times of economic expansion. When an economy is thriving, companies are likely to exceed earnings expectations, which can drive stock prices up over time.
However, it proves beneficial only when one comprehends the nitty-gritty of the market. This popular investment strategy aims to yield profits by seizing opportunities in upward trends while avoiding declining assets. Edited excerpt:
BT: Is the momentum-based investment style distorting the valuations? How has the performance of momentum-based index funds been?
CH: Momentum, as an investment strategy, tends to outperform the market in times of broad market rallies. The recent year has been an example of such a broad market rally. A momentum-based index Nifty200 Momentum 30 has given a 68.89% return in 1 year (as of 29th February 2024), outperforming most broad market indices like Nifty 50 (28.49% return as of 29th February 2024).
BT: When do you think one should take advantage of momentum investing?
CH:Momentum investing is often favoured during times of market optimism. During such periods, traders tend to be more comfortable taking on riskier assets with the potential for higher returns. When the market sentiment is bullish, stocks with momentum often perform better than the market average.
Moreover, momentum investing can be particularly potent for investors with shorter-term investment horizons. This is because they can potentially benefit from market inefficiencies and overreactions that can sometimes skew the stock market. Short-term market fluctuations often carry momentum which can be leveraged for profits.
However, it's imperative to apply prudent risk management strategies when using a momentum-based approach. This includes maintaining a diversified portfolio and having appropriate stop-loss orders in place to protect against potential downturns.
BT: Factor-based investing styles like Momentum and Value are currently seen to be in the limelight. Can we say that finding real Value in the current phase is relative? How can a Value fund help simplify it?
CH:Value investing is based on the principle of choosing constituent stocks with relatively ‘cheaper’ companies with lower valuation metrics (like lower PE Ratio, lower PB Ratio and higher return on capital employed). Momentum strategies are based on selecting a portfolio with well-performing stocks, with the assumption that they will continue to do well in the future. With the assumption that the market is cyclical in nature, factor-based value or momentum strategies can be ideal tools to navigate the market.
BT: Though gold is not a correlated asset when compared to equity and debt, its role from a diversification perspective is important, but when gold is also at its all-time high, how can one be reassured that it will help the portfolio diversify the risk?
CH:Gold is a time-tested asset class which should be present in all investment portfolios. During times of market crisis, gold tends to outperform other assets. Recent global unrest like the Russia-Ukraine crisis, Israel-Hamas crisis, Covid-19-led global lockdowns, major countries like the UK, Japan, Ireland and Finland going into recession, sentiments of de-dollarization, Red Sea trade disruptions, etc, have led to increased risk sentiments in the markets. In an environment of high risk, gold tends to benefit due to its status as a ‘safe-haven’ asset class. Despite the recent run-up in gold prices, gold remains an attractive investment avenue which can help diversify risk in any portfolio.
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BT: With rates touching their peak levels, there are expectations that rate cuts will start soon, which are the sectoral funds that are expected to become promising. What are the advantages of opting for a sectoral fund through a passive route?
CH:With market expectations of rate cuts in June, sectors like financial services may witness improving Net Interest Margins. Lower funding costs could also benefit the Infrastructure and auto sectors. With interest rates coming down in global markets, mainly the US, IT service companies could also foresee higher demand projections.
A passive investing strategy is essentially identifying an appropriate sectoral benchmark and investing through any passive fund tracking that benchmark. As indices are carefully designed and back-tested by index providers, this strategy helps provide a well-diversified exposure to desired sectors while minimising idiosyncratic risk, which could come into play while selecting components of the investment portfolio.