Momentum Strategy (Practical Application)
A momentum strategy in equity investing systematically allocates to stocks that have generated the strongest relative returns over a defined lookback period — typically six to twelve months — on the premise that recent outperformers continue to outperform over the short to medium term, with the Nifty 200 Momentum 30 Index providing a live Indian benchmark for this factor.
Academic evidence for the momentum anomaly in equities was first rigorously documented by Jegadeesh and Titman in their 1993 Journal of Finance paper, which showed that US stocks in the top decile of six-month returns significantly outperformed those in the bottom decile over the subsequent three to twelve months. Subsequent research confirmed the momentum premium across global markets including India, establishing it as one of the most robust and persistent equity risk premia alongside value and size.
NSE Indices launched the Nifty 200 Momentum 30 Index as the first major Indian exchange-based momentum factor index. The index selected 30 stocks from the Nifty 200 universe based on a normalised momentum score calculated from six-month and twelve-month price returns, adjusted for volatility (dividing raw return by standard deviation to produce a risk-adjusted momentum ranking). Constituent weights were capped and the index was rebalanced semi-annually in March and September. From its base date of April 2005 through to 2024, the Nifty 200 Momentum 30 Index significantly outperformed the Nifty 200, delivering higher annualised returns with only modestly higher volatility, validating the momentum premium in the Indian context.
The practical mechanics of implementing momentum in Indian markets carried several important considerations. First, momentum experienced predictable seasonal patterns and regime dependencies. In trending, liquidity-rich bull markets — such as the 2020-2022 recovery — momentum delivered exceptional performance as winning sectors continued winning on the back of sustained institutional flows. In sharp reversals or mean-reverting markets — such as the market correction of October 2021 to June 2022 — momentum strategies experienced characteristic crashes when recent winners reversed sharply and recent losers rebounded.
Second, momentum was a higher-turnover strategy than value or quality. The semi-annual rebalancing of the Nifty 200 Momentum 30 meant that up to 30-40% of constituents changed at each rebalancing, producing significant transaction costs and capital gains tax events for investors in taxable accounts. Passive ETF products tracking the momentum index absorbed these costs automatically within the fund, making them more tax-efficient for individual investors than replicating the strategy directly in their own accounts.
Third, sector concentration was a characteristic feature of momentum at various points in the cycle. When a sector outperformed strongly over a sustained period — such as PSU capital goods and power companies in 2023-2024 — the momentum screen would load heavily into those names, concentrating the portfolio in the most recently performing theme. Investors needed to understand that a momentum portfolio was not diversified across sectors in the traditional sense; it was diversified across recent performance leaders, which at any given time could span a narrow set of sectors.
Indian asset managers launched passive ETFs and index funds tracking the Nifty 200 Momentum 30 from around 2019-2020. By 2024, multiple AMCs including Mirae Asset, UTI, and HDFC Mutual Fund offered momentum factor funds, providing retail investors with convenient, low-cost access to the premium. For investors combining factor exposures, momentum was often paired with quality or value in a multi-factor portfolio framework to reduce factor-specific cycle risk, reflecting the finding that momentum and value were negatively correlated in their performance cycles.