Nippon, Axis mutual funds set to launch active momentum offerings

With momentum as a factor continuing to deliver, mutual funds (MFs) are exploring the active side of it. In the coming months, two of the largest fund houses — Nippon India and Axis — are expected to launch active momentum funds.

At present, there is only one active momentum fund, that of Samco MF. Most other fund houses have momentum factor-based funds on the passive side.

These passive funds have delivered strong performances in the past few years amid a bull run in the market. For example, the Nifty200 Momentum 30 index has delivered over 65 per cent return in the last one year as compared to 38 per cent rise in Nifty 500.

Momentum investors hold the belief that once a trend, whether upward or downward, takes shape, it is likely to persist for a certain period. Hence, they seek to take advantage of market volatility by taking positions in stocks going up.

While a passive structure suits the concept, experts say that the active route gives better control to protect downside and allows creation of a better quality portfolio.

Explaining the difference between active and passive momentum funds, Paras Matalia, fund manager & head of research at Samco MF, said the control and flexibility that comes with the active approach can lead to better performance.

"Active funds can protect downside by lowering net equity exposure during periods of market decline. The approach also allows for real-time rebalancing as opposed to the fixed timing (every six months) in the case of passive funds,” Matalia said.

Active funds also have the freedom to choose the stock universe and the number of stocks in the portfolio, he added.

As per the Axis MF filing with the Securities and Exchange Board of India (Sebi) for fund approval, its active momentum fund builds a portfolio based on its quantitative model but the final discretion will lie with the fund manager.

"Once the universe is finalized, we will use our proprietary quantitative model to rank stocks based on momentum. The quantitative model calculates the momentum score using any one or more metrics. For instance, the fund may consider price-based momentum strategy where the price and/or total returns of the stock across different time horizons may be considered. The fund manager will then take the output from the model and based on his views of the current market dynamics, select stocks and its weights in the portfolio to construct the final portfolio at his discretion,” the fund house stated in its filing.

Nippon MF also plans to manage the fund through a quantitative model.

"The quantitative model, which will be used for stock selection, will be primarily based on momentum factor that will consider both absolute and relative momentum. The momentum factor attempts to capture the market trends through price momentum adjusted for risk. Momentum strategy can work in both up and down trending market phases," Nippon MF's draft filing states.