Momentum funds may deliver high long-term returns for aggressive investors

With improving market conditions and clearer sector trends, experts say momentum-based index funds could suit investors willing to take short-term volatility

Rate cuts by the Reserve Bank of India (RBI), stable macroeconomic indicators, and easing geopolitical tensions have improved investor sentiment in equity markets. Riding on this optimism, SBI Mutual Fund has launched the new fund offer (NFO) of the SBI Nifty200 Momentum 30 Index Fund.

 

“The stage is well set with operating rates near 5.5 per cent, credit growth below 10 per cent, inflation under 4 per cent and GDP growth around 6.5 per cent. Banking system liquidity remains ample. These offer a favourable backdrop for equities, and in particular, for a momentum strategy that offers investors a low-cost, rule-based exposure to a factor that has historically delivered outperformance across cycles,” says DP Singh, deputy managing director and joint CEO, SBI Mutual Fund.

What are momentum funds?

Momentum index funds and exchange-traded funds (ETFs) track indices that select stocks trending upward using statistical tools. The Nifty200 Momentum 30 Index includes 30 high-momentum stocks from the top 200 companies by market capitalisation. Similarly, the Nifty Midcap150 Momentum 50 Index selects 50 such stocks from the midcap space. 

A factor index selects stocks based on specific attributes like value or momentum, while a market-cap index weights stocks purely by their market capitalisation.

 

“The strategy plays on the tendency of markets to exhibit herding behaviour, where investors collectively drive prices in the same direction. By identifying trends early, momentum investors can profit from these collective moves,” explains Sirshendu Basu, head – products, Bandhan Asset Management Company.

 

As passive instruments, these funds carry low costs and eliminate fund manager risk. 

Volatility is inherent

Momentum fund performance can swing widely. The UTI Nifty200 Momentum 30 Index Fund (regular plan), for instance, returned –5.95 per cent in 2022, a strong 40.67 per cent in 2023, and 20.53 per cent in 2024. As of June 30, 2025, its year-to-date return stood at –2.93 per cent, according to Value Research.

 

“Momentum strategies fell over the past year, driven by weakness in high-weight sectors like consumer discretionary and industrials, which are typically procyclical and had previously shown strong momentum,” says Basu.

 

These strategies tend to underperform during periods of heightened volatility or rapid sector rotation. “Over the past year, we’ve seen frequent shifts in sector leadership and corrections in high-valuation stocks — both of which have impacted the performance of momentum funds,” says Niranjan Avasthi, Senior Vice President, Edelweiss Mutual Fund.

Market environment turning favourable

Experts believe momentum strategies could see improved performance if the market stabilises.

 

“With markets showing signs of stabilisation and reduced sector churn, the current environment appears conducive for momentum strategies. A strong, trending market with clear sector leadership typically provides the ideal conditions for these strategies to thrive,” says Avasthi.

Know the risks

Momentum funds are sensitive to market reversals. “Most momentum strategies are rebalanced semi-annually or quarterly. Market trends may not be captured as the strategy updates positions at fixed intervals, rather than responding to real-time market movements. A sudden change in market sentiment can quickly reverse trends,” notes Basu.

 

Avasthi adds: “They often experience sharper drawdowns during sudden market corrections or periods of heightened volatility, making them potentially challenging for investors with low risk tolerance.”

Who should invest?

Momentum funds are best suited for aggressive investors with a long-term horizon. “An ideal holding period would be at least five years or more to allow this strategy sufficient time to play out and deliver to its potential. Around 10–15 per cent allocation within the equity portion of the portfolio is reasonable, depending on the investor’s risk profile and goals,” says Singh.

 

Basu suggests including these funds as part of the satellite portfolio rather than core holdings.