Momentum Investing
Momentum investing is an investment strategy that involves purchasing securities that have outperformed their peers over a recent lookback period on the premise that stocks with strong recent price trends tend to continue outperforming in the near term.
The momentum anomaly — the tendency of recent winners to keep winning and recent losers to keep losing over medium-term horizons — is one of the most extensively documented phenomena in financial literature. Pioneering research by Jegadeesh and Titman in 1993 demonstrated that a strategy of buying top-performing stocks over the past six to twelve months and shorting the worst performers generated statistically significant excess returns in the United States over multiple decades. Subsequent studies replicated these findings across global markets, including India.
In the Indian context, multiple academic papers using NSE and BSE data have found robust momentum effects. Stocks ranked in the top decile of trailing six- to twelve-month returns have historically outperformed the market in subsequent months. This momentum in Indian equities is partly attributed to the herding behaviour of retail investors, gradual incorporation of fundamental information into prices, and the earnings revision cycle that causes institutional analysts to raise forecasts gradually rather than all at once.
NSE Indices Limited operationalised momentum through the Nifty 200 Momentum 30 Index, launched in 2020. The index selects 30 stocks from the Nifty 200 universe using a normalised momentum score based on six-month and twelve-month returns, adjusted for volatility. The index is rebalanced semi-annually, which keeps turnover manageable while refreshing the portfolio to capture emerging momentum leaders.
A significant risk in momentum strategies is the momentum crash — a sharp, rapid reversal that occurs when market sentiment shifts abruptly. Such crashes have been observed globally during market recoveries from deep bear phases, when beaten-down, low-momentum stocks recover sharply while recent winners stagnate. The Indian market saw this dynamic during the recovery from the March 2020 COVID-19 crash, where many prior momentum leaders briefly underperformed as cyclical value stocks surged.
For investors, pure momentum strategies typically require systematic discipline, predefined rules, and tolerance for periods of underperformance. Used within a factor-diversified portfolio alongside quality and low-volatility tilts, momentum can serve as a complementary source of return over a full market cycle.