How do active momentum funds work, and are they worth buying?

How do they work?

Momentum investing involves buying stocks that have been rising and selling those that are losing steam. Passive momentum funds do this mechanically by tracking an index such as the Nifty500 Momentum 50 or the Nifty200 Momentum 30, which ranks stocks on their six-month and one-year price returns and rebalances twice a year. Active momentum funds run their own models, which differ sharply in the signals they follow.

There are earnings-momentum funds, which anchor to fundamentals rather than price. Examples include ICICI Prudential AMC and Kotak AMC’s active momentum funds. "Our strategy is based on earnings momentum, not price momentum. We look for companies where the earnings trajectory is improving and earnings are coming in better than market expectations,” said Manasvi Shah, fund manager at ICICI Prudential AMC. To avoid placing undue weight on a single strong quarter, the fund assesses earnings trends over the previous three quarters and complements this with a qualitative review of company-specific developments, news flow and management actions.

Some funds blend price momentum with a fundamental or quality overlay. Motilal Oswal applies its momentum model on top of stocks already under its research coverage, vetted through the firm’s quality, growth, longevity and price (QGLP) framework. “We apply our proprietary momentum model, which generates investment ideas and suggested allocations. The quality filter remains intact because every stock is already under active coverage,” said Ajay Khandelwal, head of equity at Motilal Oswal AMC. “If a stock has shown no meaningful price movement over the last three to six months, it generally will not feature in this scheme,” he added.

Nippon India’s active momentum fund also blends price and earnings momentum, but is built in a way that lets it adjust to the market’s mood. Its model can tilt the portfolio towards more aggressive, higher-risk stocks when the market is recovering, and towards steadier, lower-volatility names when the market looks overheated or is falling. It uses signals such as how broad the rally is to decide when to switch.

At the other end are the price-momentum funds—such as Samco, Union and the newly launched NJ Momentum Fund—which follow price signals through their internal rules and filters. Even within this group, approaches vary: some models leave room for the fund manager to act between scheduled rebalances, while NJ’s model is fully rule-based with no manager discretion. Union Mutual Fund, for instance, allows its manager to exit a stock before scheduled re-balances if an adverse event threatens value.

What all of them promise over a passive momentum fund is faster rebalancing and a wider hunting ground. “Faster rebalancing is one of the biggest advantages of an active momentum strategy,” said Umeshkumar Mehta, chief investment officer at Samco AMC, whose universe spans around 750 stocks. Union AMC makes a similar case. “This fund is rebalanced more frequently, which keeps the momentum factor fresh,” said Gaurav Chopra, fund manager–equity at Union AMC, whose model screens the top 1,000 companies by free-float market capitalization.

Managing the downside

Momentum’s weak spot is that it can fall hard when trends reverse. Active momentum funds try to manage this in different ways.

Samco relies on hedging. “If markets decline, we hedge the portfolio through futures of underlying shares or by exiting stocks where futures are not available, to reduce net equity exposure,” said Mehta. He cited a live example: in almost all of March 2026, during the peak of US-Iran war tension, the fund was hedged by 50%. So, half of its portfolio had zero net equity exposure. In early days of April the fund went back to 100% equity exposure. The strategy can, in principle, cut net equity exposure sharply in a prolonged bear market.

ICICI Prudential’s fund leans on its earnings signal and a tilt toward larger companies when conditions turn. “The strategy is market-cap agnostic, drawing its investment universe from the Nifty 500 Index. While it can invest across large-, mid- and small-cap stocks, allocations are driven by earnings momentum rather than market capitalization. As a result, the portfolio may tilt towards large-caps when they offer stronger earnings visibility," said Shah. She noted that the strategy is likely to be less effective during prolonged sideways markets, where the absence of a clear earnings momentum trend limits the opportunity to generate differentiated returns.

Union’s active momentum fund raises cash in what it calls ‘anti-momentum’ phases. “During periods of anti-momentum, we try to raise cash levels to permissible limits under the investment mandate to protect the downside,” said Chopra, adding that the fund does this when its model throws up relatively few stocks that clear its momentum tests. Liquidity, he said, is a critical input in the model, which is built to hold only companies that are widely owned and traded, helping keep impact costs low during rebalancing.

“We monitor the portfolio on a daily basis. If price momentum weakens, we can reduce or exit positions without waiting for the next earnings update,” said Khandelwal of Motilal Oswal AMC.

Investor takeaways

Financial advisors say investors should first understand the risks of momentum factor. “Momentum as a factor has done well in Indian markets over the long term. A momentum strategy paired with certain qualitative filters can also build some quality checks into the portfolio, which is what active momentum funds seek to do,” said Kavitha Menon, founder of Probitus Wealth. She cautioned, however, that momentum can still see sharper corrections when markets fall, unless the fund’s model has strong controls to manage the downside.

Because active momentum funds are still new, they should ideally be given time to build longer track records. Investors should watch how these funds participate in both the upside and the downside of markets before considering them.