A momentum fund is a type of investment fund that follows the market’s current winners. It focuses on companies that are already showing strong upward trends—whether it’s in their stock price, earnings, or revenue. The idea is to buy into stocks that are on the rise and potentially profit while they continue to climb. Fund managers using this strategy aim to capture gains from ongoing trends. They typically invest in companies showing clear positive momentum—and in some cases, they may even short-sell stocks that are falling in value. While many investment products use momentum as one of several factors, momentum funds are unique because they rely on this principle entirely. If you're someone who follows market trends and wants to ride the wave of outperforming stocks, momentum funds might just fit your strategy. Explore top-performing mutual funds!
What is a momentum fund?
A momentum fund is an investment vehicle that targets stocks or assets showing upward movement in price. The core idea is simple: assets that have been doing well lately are more likely to continue performing well in the near term. It’s based on the belief that momentum can persist—at least for a while.
To find these high-momentum stocks, fund managers use a mix of data points such as past price trends, trading volume, and strength relative to the overall market. They use quantitative analysis and modelling techniques to shortlist the assets that fit their criteria. The goal is to ride these trends while they last and exit before the momentum fades.
Momentum funds appeal to investors looking to benefit from fast-moving opportunities. But they come with a caveat—they rely heavily on short-term market trends. That means they can be more volatile than traditional long-term strategies, especially during market downturns. If you’re considering this style of investing, make sure it matches your comfort with risk and short-term price swings.
How does a momentum fund work?
Momentum funds use a wide set of indicators to assess which stocks have strong forward momentum. These indicators can include changes in share price, revenue growth, or rising earnings. The goal is to identify stocks that are already on a positive trajectory—and that have the potential to continue climbing.
Many exchange-traded funds (ETFs) now track indices based on momentum. These indices rank and score stocks based on their recent performance. A momentum score is assigned using a mix of technical and fundamental factors, such as:
Value (how attractively priced the stock is)
Size (large-cap vs small-cap)
Quality (consistency of earnings or low debt levels)
This score combines both historical performance (returns) and business fundamentals, giving fund managers a clearer view of which stocks deserve inclusion.
Unlike pure technical trading, momentum funds blend market behaviour with business health. For instance, if a stock has shown consistent revenue and earnings growth alongside strong price trends, it may be prioritised. Some funds may also use technical signals, like price breakouts, to make decisions.
However, investors should tread carefully. Momentum funds often have high exposure to systemic risk—they can rise rapidly in bull markets but also fall sharply when sentiment shifts. Since they tend to mirror broader market trends, they may not offer much downside protection during corrections. By focusing on past winners, momentum funds offer a more data-backed strategy—but be mindful of the volatility they may bring. Start SIPs with just Rs. 100
Analysis of momentum fund
Momentum investing has been studied for years—and it’s not just theory. Research suggests that momentum strategies can deliver strong returns, even in markets like India. Many studies have shown that stocks which performed well in the past often continue to do well in the short term, especially when backed by solid earnings or technical indicators.
In fact, momentum investing has challenged traditional market theories like the Efficient Market Hypothesis (EMH). In the Indian context, recent research indicates that momentum strategies have outperformed the broader market—particularly those based on weekly tracking. One such strategy involves buying the strongest performers and selling the laggards, aiming to ride trends before they reverse.
Experts believe that behavioural biases among investors—like chasing popular stocks or hesitating to sell losers—fuel the momentum effect. By using a systematic approach and adding quality checks (called "momentum quality"), funds can aim for better risk-adjusted performance and reduce the impact of downturns. Studies suggest momentum-based funds often outperform the market, making them an attractive research-backed option for risk-tolerant investors. Open your mutual fund account today!
Should you invest in momentum funds?
Momentum funds can be appealing if you're looking to tap into short-term stock trends and aim for higher returns. These funds follow a proven approach: buy what’s already going up. By using a mix of technical and fundamental analysis, they aim to select stocks that have consistently shown strong recent performance.
In fact, data shows momentum funds often outperform the market over time. One study found that they experienced positive monthly returns 63% of the time, compared to just 54% for the general index. This track record makes them attractive for investors seeking growth.
But it’s not all upside. These funds can be volatile and sensitive to sudden market shifts. Since they follow trends, a sharp correction can trigger quick losses. If you’re someone who worries during downturns, this could be a challenge. To manage this, some investors explore volatility-adjusted strategies—a variation of momentum investing that tries to limit downside while keeping most of the potential upside.
How much to invest?
How much you should put into a momentum fund depends on your personal goals, risk appetite, and how your overall portfolio is structured. These funds are known for their growth potential—but they also carry higher risks because they track fast-moving assets.
Start by reviewing your current financial situation and what you hope to achieve. If you’re a high-risk investor aiming for strong returns, you might choose to allocate a larger chunk to momentum funds. But it’s important not to go all-in.
Most financial experts suggest keeping 10–20% of your portfolio in momentum funds. This allows you to benefit from short-term market trends without putting your entire portfolio at risk. The rest of your investments should be more balanced—like long-term equity funds, fixed income, or index funds. It’s also wise to revisit your investment regularly. Market conditions change, and so should your allocation. You might also consult a financial advisor to help decide how much exposure to momentum investing makes sense for your unique situation. A 10–20% portfolio allocation is common for momentum funds—balance it with safer options to reduce risk. Start SIP with just Rs. 100!
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Benefits of momentum funds
Momentum funds offer a unique mix of speed, data-driven selection, and the potential for high returns. Here are some of their key benefits:
1. Potential for high returns
Momentum funds aim to capture stocks that are already on a strong upward trend. If you invest in stocks that have recently shown solid growth, and if that momentum continues, you stand a good chance of earning attractive returns. These funds are designed to ride the wave while it lasts.
2. Objective, quant-based approach
Unlike emotional or speculative investing, momentum funds rely on quantitative analysis. This includes tracking visible trends in stock prices and measurable performance indicators. Because decisions are driven by data—not emotion—they reduce the chances of bias creeping into the selection process.
3. Built-in diversification
It can be tough to find stocks that move independently from each other. But momentum investing often brings in a naturally diversified set of assets. You may find yourself invested across different sectors, reducing concentration risk. By choosing strong performers across varied industries, these funds help balance your portfolio more effectively.
4. Active trading opportunities
Momentum investing thrives on short-term price movements. It involves actively buying and selling based on ongoing trends. For investors or fund managers who enjoy a more active approach, momentum funds allow them to capitalise on market inefficiencies and quick shifts—something passive strategies may miss.
Summary
Momentum investing is all about spotting stocks that are already climbing—and staying with them while the trend continues. There are two common strategies used:
Relative momentum: This means comparing the performance of several stocks in the same asset class and choosing the best performers.
Absolute momentum: Here, you look at a single stock’s historical performance and invest if it’s showing strength compared to its past.
Both strategies aim to help investors focus on winners and drop underperformers. Momentum funds combine these techniques with real-time data and trend tracking to build portfolios that reflect current market leaders. If you’re open to short-term volatility and willing to embrace a trend-based approach, momentum funds can be a powerful addition to your investment mix.
Start investing in mutual funds as per your risk appetite. To assess your future investment, explore multiple mutual fund schemes at the Bajaj Finserv Mutual Fund Platform. Compare them by checking probable returns on the SIP calculator or the lumpsum calculator. What are you waiting for? Invest now.
