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Business News/ Mutual Funds / Your Questions Answered: How is the Nifty 200 Momentum 30 Index different from Nifty 200 Index?
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Your Questions Answered: How is the Nifty 200 Momentum 30 Index different from Nifty 200 Index?

The Nifty 200 Momentum 30 Index selects the top 30 companies based on momentum scores from the Nifty 200. It targets high-growth sectors and businesses, but with limited diversification and higher risk.

Nifty 200 Momentum 30 Index captures high-momentum stocks within Nifty 200 universe.Premium
Nifty 200 Momentum 30 Index captures high-momentum stocks within Nifty 200 universe.

Q. I am an executive working with an MNC in Mysore. My wife is also working as an advertising executive with an ad agency. We have been investing in midcap and small funds. Recently an acquaintance suggested that we should explore mutual funds investing in the Nifty 200 Momentum 30 Index. We have limited knowledge about momentum indices. Can you please elaborate on the Nifty 200 Momentum 30 Index, how it is different from the Nifty 200 Index, and what are the pros and cons of investing in the Nifty 200 Momentum 30 Index? 

Nifty 200 Momentum 30 Index, is a unique index strategy designed to capture the performance of high-momentum stocks within the Nifty 200 universe. However before we understand what the Nifty 200 Momentum 30 Index is, it is important that we understand what the Nifty 200 Index is. 

The Nifty 200 is a broad-based market capitalization weighted index launched by the National Stock Exchange of India (NSE) in 1993. It comprises 200 companies spread across various sectors, including large-cap and mid-cap stocks. The Nifty 200 holds immense significance for various reasons:

Market representation: It represents approximately 82% of the free-float market capitalization of all listed companies on the NSE as of September 29, 2023. This translates to a comprehensive picture of the overall market performance.

Benchmark for mutual funds: Many actively managed equity mutual funds in India benchmark their performance against the Nifty 200. This allows investors to compare the fund's returns to the broader market and assess the fund manager's skills.

What is the Nifty 200 Momentum Index? 

This index, launched in 2002, tracks the performance of the top 30 companies within the Nifty 200 based on their "Normalised Momentum Score." This score considers both the 6-month and 12-month price returns of each company, adjusted for daily price return volatility. Essentially, the index identifies companies experiencing strong recent price appreciation while accounting for risk associated with that growth.

How does it work?

Selection: The index reviews all companies in the Nifty 200 every six months (June and December).

Scoring: It calculates the normalised momentum score for each company.

Weighting: Companies are then ranked based on their score, with the top 30 included in the index.

Unique weighting: Each selected company's weight in the index is determined by multiplying its free-float market capitalization by its normalised momentum score. This "factor tilt methodology" ensures companies with higher momentum scores have a greater influence on the index performance.

Key characteristics

Focus on momentum: The index aims to capture short-term price trends and potentially outperform the broader market in rising phases.

Limited diversification: With only 30 companies, the index is less diversified compared to broader indices like the Nifty 50, increasing its volatility.

High risk: The focus on momentum exposes investors to potentially higher fluctuations in share prices compared to other investment options.

Benefits

Potential for high returns: The index has the potential to deliver strong returns since it tracks high-momentum companies. 

Exposure to growth opportunities: By targeting companies with strong momentum, the index offers exposure to potential high-growth sectors and businesses.

Risks

Increased volatility: As mentioned earlier, the limited diversification and focus on momentum lead to higher fluctuations in the index value. This can be stressful for risk-averse investors.

Sensitivity to market downturns: During market corrections or crashes, companies experiencing high momentum can see steeper price declines compared to less volatile stocks.

Differences between Nifty 200 and Nifty 200 Momentum 30 Index

While both the Nifty 200 and Nifty 200 Momentum 30 are indices associated with the NSE, they differ significantly in their composition, selection methodology, and risk-return profile. Here's a breakdown of the key differences:

Scope and composition

Nifty 200: Covers a broader scope, including 200 companies across various sectors (large-cap and mid-cap). It aims to represent the overall market performance of the NSE.

Nifty 200 Momentum 30: Focuses on a narrower set of 30 stocks selected from the Nifty 200 based on their momentum score. This score considers both recent price returns (6 months and 12 months) and volatility to identify stocks experiencing upward price trends.

Selection methodology

Nifty 200: Companies are chosen based on their market capitalization (size). The larger the market cap, the higher the weightage the company has in the index. This methodology ensures the index reflects the market dominance of large companies.

Nifty 200 Momentum 30: Selection is based on a momentum score, not market cap. Stocks with the highest momentum score get included in the index, regardless of their size. This approach focuses on capturing short-term trends and the potential for continued growth.

Risk-return profile

Nifty 200: Generally considered less volatile due to its diversified nature and larger number of constituents. However, it may offer lower potential returns compared to the Nifty 200 Momentum 30.

Nifty 200 Momentum 30: Potentially more volatile due to its concentration on high-momentum stocks, which are inherently riskier but also have the potential for higher returns if the momentum continues.

Who should consider the Nifty 200 Momentum 30 Index?

This index is suitable for aggressive investors with a high-risk tolerance and a long-term investment horizon. They should be comfortable with market volatility and understand that the potential for high returns comes with an increased risk of losses.

In conclusion, the Nifty 200 Momentum 30 Index presents a unique opportunity for aggressive investors in the Indian market. However, it’s crucial to understand its inherent risks and ensure it aligns with your investment goals and risk tolerance. By making informed choices and seeking professional guidance, you can navigate the intricate world of Indian mutual funds with greater confidence.

Note: This is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.

Kuvera is a free direct mutual fund investing platform.

 

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Published: 06 Mar 2024, 04:56 PM IST
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