Your Questions Answered: What are the pros and cons of investing in mutual funds tracking Nifty200 Momentum 30 Index?

Mutual Funds: The Nifty200 Momentum 30 Index tracks 30 high-momentum stocks from the Nifty200, aiming for high returns. It employs a systematic selection process but carries risks, particularly in volatile markets. Investors should assess their risk tolerance before investing in related mutual funds

Kuvera
Published17 Sep 2024, 01:26 PM IST
Mutual Funds: The Nifty200 Momentum 30 Index targets high-momentum large/mid-cap stocks.
Mutual Funds: The Nifty200 Momentum 30 Index targets high-momentum large/mid-cap stocks.

I am a senior researcher working with a pharmaceutical company in Hyderabad. Me and my family have been investing in large-cap index funds since the past 10 years. We wish to diversify to other market segments. Some of my acquaintances have suggested investing in mutual funds tracking the Nifty200 Momentum 30 Index. However, I have little understanding of momentum investing and the Nifty200 Momentum 30 Index. Can you please elaborate on what the Nifty200 Momentum 30 Index is and also the pros and cons of investing in mutual funds tracking the Nifty200 Momentum 30 Index?

Pratham Reddy, Hyderabad, Andhra Pradesh

The Nifty200 Momentum 30 Index represents a strategic investment approach aimed at tracking the performance of 30 high-momentum stocks selected from the large and mid-cap segments. This index is a subset of the Nifty200 and is designed to reflect the behavior of stocks with high momentum scores. The momentum score for each stock is calculated based on its recent 6-month and 12-month price returns, adjusted for volatility, providing a robust measure of performance.

Understanding momentum investing

Momentum investing is a strategy that aims to capitalise on the continuation of existing market trends. The core idea is that stocks that have performed well in the past are likely to continue performing well in the short to medium term. The Nifty200 Momentum 30 Index is constructed by selecting stocks that have shown significant momentum, making it an attractive option for investors looking to invest in a trend-following strategy.

Momentum mutual funds are distinguished by their strategy of investing in securities that have shown strong and steady price growth over a period, typically ranging from six to twelve months. This approach is fundamentally different from value investing, which focuses on assets perceived to be undervalued. Instead, momentum funds aim to ride the wave of an asset's price appreciation, banking on the trend's persistence.

However, as with any investment strategy, momentum mutual funds come with their own set of risks. Their performance is heavily reliant on market conditions, and they may not fare as well in bearish or flat markets. The strategy's success hinges on the precise timing of buying and selling, which can be a double-edged sword. Holding onto an asset for too short or too long can both be detrimental to the investment's outcome.

Also Read | Is investing in mutual fund tracking Nifty 100 Equal Weight Index a good choice?

Composition and performance

The index's composition is dynamic, reflecting ongoing changes in stock performances. As of the latest data, top gainers in the index include prominent companies like Trent Limited and Bharti Airtel Limited (as of 31st August 2024), showcasing a diverse range of sectors from apparel to telecommunications. The index's methodology ensures that it is well-balanced and representative of various industries, thereby mitigating sector-specific risks.

Investment vehicles

Investors looking to gain exposure to the Nifty200 Momentum 30 Index have multiple avenues. There are mutual funds and ETFs that track the performance of this index. These investment vehicles provide an easy and efficient way to invest in the high-momentum stocks of the Nifty200.

Risk and suitability

Mutual funds tracking the Nifty200 Momentum 30 Index have been classified under the applicable Securities and Exchange Board of India (SEBI) regulations as 'very high risk' on the riskometer rating, indicating that they are suitable for investors with a high-risk appetite. The index's performance can be more volatile than broader market indices due to its focus on high-momentum stocks. Therefore, it is recommended for investors who are willing to accept higher levels of risk in exchange for the potential of higher returns.

Eligibility criteria for Nifty200 Momentum 30 Index

The selection of stocks for the Nifty200 Momentum 30 Index is a meticulous process that hinges on several eligibility criteria:

Stock universe: The primary pool of stocks considered for inclusion in the index is the Nifty200 universe, which comprises 200 large and mid-cap stocks listed on the National Stock Exchange (NSE) of India. The stock must have a minimum listing history of one year.

Momentum score: The core of the selection process is the 'momentum score.' This score is calculated based on the 6-month and 12-month price returns of the stocks, adjusted for their daily price return volatility. The aim is to identify stocks that have shown consistent performance over time without extreme fluctuations.

Factor tilt methodology: Once the momentum scores are determined, the index employs a 'factor tilt methodology' to assign weights to the stocks. This involves multiplying the free float market capitalisation of each stock with its normalised momentum score.

Weight capping: To ensure diversification and manage risk, the weight of any single stock in the index is capped. The cap is set at the lower of 5% or 5 times the weight of the stock in the index based solely on free-float market capitalisation.

Review and rebalancing: The index is reviewed and rebalanced semi-annually in June and December. This ensures that the index remains reflective of the current market trends and that the stocks maintain their high momentum status.

Also Read | I want to invest in Nifty Midcap 150 Index. Please elaborate its pros and cons

Pros and cons of investing in a Nifty200 Momentum 30 Index fund

Investing in a mutual fund that tracks the Nifty200 Momentum 30 Index can be an intriguing option for investors looking to capitalise on the growth potential of high-momentum stocks. However, it is best to weigh the pros and cons before considering investing in funds that track this index.

Pros

Potential for higher returns: Momentum investing is based on the premise that stocks that have performed well in the past will continue to perform well in the near future. Therefore, the Nifty200 Momentum 30 Index could offer the potential for higher returns compared to broader market indices.

Exposure to growth opportunities: Investors gain exposure to companies currently showing strong performance, which could lead to significant growth opportunities.

Systematic selection process: The index employs a systematic process to select stocks based on their momentum scores, which can help identify stocks with the potential to outperform.

Diversification: By investing in 30 different stocks across various sectors, investors can achieve a diversified portfolio, which can help in mitigating risk.

Transparency and accessibility: The index provides a transparent and systematic approach to investing in high-momentum stocks, making it accessible even to those who may not have the expertise to analyse individual stocks.

Cons

Higher risk: High-momentum stocks can be more volatile, which means there's a higher risk of loss, especially in the short term.

Performance in different market conditions: High-momentum stocks may not perform well in all market conditions, particularly during market downturns when investors may prefer more stable investments.

Performance and returns comparison with Nifty 50

As of August 30, 2024, the Nifty200 Momentum 30 Index has given a one-year total return of 68.91%. It has provided a 5-year compounded annual total return of 30.53%. In comparison, as of August 30, 2024, the Nifty 50 Index has given a one-year return of 32.64% and a 5-year compounded annual return of 19.39%.

Note: Past performance is not an indication of future returns.

Taxation

The Indian Budget 2024 has brought about significant changes in the taxation of mutual funds, particularly those tracking the Nifty200 Momentum 30 Index. Investors looking to understand these changes will find that the budget has aimed to simplify the tax structure while encouraging long-term investments in the equity market.

For mutual funds tracking the Nifty200 Momentum 30 Index, the taxation rules post-budget 2024 are as follows:

Long-term capital gains (LTCG) tax: If the mutual fund units are sold after one year from the date of investment, gains up to INR 1.25 lakh in a financial year are exempt from tax. Gains exceeding 1.25 lakh are taxed at a rate of 12.5%.

Short-term capital gains (STCG) tax: If the mutual fund units are sold within one year from the date of investment, the entire amount of gain is taxed at a rate of 20%.

These changes reflect the government's approach to promoting long-term holdings in mutual funds by offering a tax exemption on smaller gains and imposing a higher tax rate on short-term trades, which are often associated with higher market risk.

Investors should note that the tax rates are applicable only to the realised gains and not on the invested principal amount. Moreover, the tax exemption on long-term gains up to INR 1.25 lakh provides a cushion for small to medium investors, aligning with the government's inclusive growth agenda.

Also Read | Mutual Funds: How to select the right index funds for your investment portfolio?

Conclusion

The Nifty200 Momentum 30 Index offers a structured path for investors looking to tap into the potential of high-momentum stocks in the Indian market. By adhering to a clear set of eligibility criteria, the index ensures that only stocks with genuine momentum and stability are included, providing a robust investment avenue for those with a higher risk appetite and a focus on capital growth.

It's important for investors to consider their own risk tolerance and investment goals when considering a mutual fund tracking the Nifty200 Momentum 30 Index. While the potential for high returns can be attractive, the associated risks and the nature of the stocks within the index should be carefully weighed. Consulting with a financial advisor can also provide personalised advice tailored to an individual's financial situation.

Kuvera is a free direct mutual fund investing platform. Unless otherwise stated data sourced from BSE, NSE and kuvera

Catch all theBudget News,Business News, Mutual Funds news,Breaking NewsEvents andLatest News Updates on Live Mint. Download TheMint News App to get Daily Market Updates.

MoreLess
First Published:17 Sep 2024, 01:26 PM IST
Business NewsMutual FundsYour Questions Answered: What are the pros and cons of investing in mutual funds tracking Nifty200 Momentum 30 Index?

Get Instant Loan up to ₹10 Lakh!

  • Employment Type

    Most Active Stocks

    Tata Steel share price

    163.70
    02:14 PM | 7 OCT 2024
    -3.05 (-1.83%)

    Axis Bank share price

    1,146.90
    02:13 PM | 7 OCT 2024
    -30.6 (-2.6%)

    Bharat Electronics share price

    266.95
    02:14 PM | 7 OCT 2024
    -10.25 (-3.7%)

    Tata Power share price

    441.00
    02:14 PM | 7 OCT 2024
    -25.7 (-5.51%)
    More Active Stocks

    Market Snapshot

    • Top Gainers
    • Top Losers
    • 52 Week High

    Eclerx Services share price

    3,119.65
    02:04 PM | 7 OCT 2024
    96.6 (3.2%)

    Coforge share price

    7,236.95
    02:03 PM | 7 OCT 2024
    113.8 (1.6%)

    Vijaya Diagnostic Centre share price

    988.75
    02:04 PM | 7 OCT 2024
    -0.2 (-0.02%)

    Dr. Lal Pathlabs share price

    3,465.00
    02:02 PM | 7 OCT 2024
    -29.25 (-0.84%)
    More from 52 Week High

    Bombay Burmah Trading Corporation share price

    2,505.05
    02:04 PM | 7 OCT 2024
    -260.2 (-9.41%)

    Rail Vikas Nigam share price

    455.15
    02:05 PM | 7 OCT 2024
    -37.95 (-7.7%)

    Railtel Corporation Of India share price

    398.75
    02:04 PM | 7 OCT 2024
    -32.8 (-7.6%)

    VIP Industries share price

    521.70
    02:04 PM | 7 OCT 2024
    -42.15 (-7.48%)
    More from Top Losers

    Finolex Industries share price

    287.45
    02:05 PM | 7 OCT 2024
    15.8 (5.82%)

    CG Power & Industrial Solutions share price

    750.25
    02:05 PM | 7 OCT 2024
    31.45 (4.38%)

    Astrazeneca Pharma India share price

    7,757.00
    02:04 PM | 7 OCT 2024
    324.5 (4.37%)

    Natco Pharma share price

    1,399.00
    02:05 PM | 7 OCT 2024
    44.35 (3.27%)
    More from Top Gainers

    Recommended For You

      More Recommendations

      Gold Prices

      • 24K
      • 22K
      Bangalore
      77,675.00-10.00
      Chennai
      77,681.00-10.00
      Delhi
      77,833.00-10.00
      Kolkata
      77,685.00-10.00

      Fuel Price

      • Petrol
      • Diesel
      Bangalore
      102.86/L0.00
      Chennai
      100.75/L0.00
      Kolkata
      104.95/L0.00
      New Delhi
      94.72/L0.00

      Popular in Mutual Funds

        HomeMarketsPremiumInstant LoanMint Shorts