Momentum investing: Know how to invest in momentum stocks

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By Balwant Jain

Return on equity investing depends on a variety of factors. This includes both macro and micro factors. As far as macros are concerned, market participants would look for details like existing and potential economic growth, inflation, interest rate etc. to gauge its impact on the economy and consequently the market. Apart from this, micro factors which are company specific in nature also come into play.

What is momentum investing?

Momentum based investing is a style of investing wherein investors reap benefits by riding an existing price trend. The decisions made in this style of investing is largely based on technical indicators related to the price movement of the stock of a company. The objective here is to benefit from stock price volatility in the short term. It is akin to surfing on the ocean waves. Here, an investor is sailing up the crest of a wave, only to jump on to the next wave before the first one crashes down.

Riding the momentum wave

One of the easiest way to invest in momentum is by taking exposure to the Nifty 200 Momentum 30 Index. Conceptualized by the NSE, this index brings together 30 names sorted on the basis of momentum factor from the top 200 companies listed on the NSE. The names from the Nifty 200 universe is processed through various filters like minimum one year of listing history, availability of the stock in Future and Option segment in order to ensure adequate liquidity, computing normalised momentum score for each of the 200 companies and arranging the companies in descending order on the basis of scores etc. The first 30 such companies satisfying all the criterion is included in the index. The weight of each company in the index is restricted to 5% as a means to avoid concentration risk. In order to keep the index relevant, the constituents are reviewed once in every six months (June and December) and if required the index is rebalanced.

Past performance of the index

The past performance of the index has been very encouraging. Rs. 1 lakh invested in the index during June 2005 would be worth Rs. 20.51 lakhs as of June 2022.A similar investment in Nifty 50 or Nifty 200 today would be worth Rs. 9.46 lakhs and Rs. 9.77 lakhs respectively. From a 10-year perspective, the index has delivered an annualized return of 19.88% while Nifty 50 and Nifty 200 have respectively given an annualized return of 12.94% and 13.44 %.

The Nifty 200 Momentum 30 index enjoys a dividend yield of 2% as against 1.5% and 1.4% for Nifty 50 and Nifty 200 respectively. In terms of price-to-earnings ratio, the momentum index is almost at par with Nifty 50 TRI and is lower than Nifty 200 TRI. When it comes to price-to-book, the index fares better than Nifty 50 TRI and Nifty 200 TRI. (Data as on June 2022).

Invest in momentum companies with ease

For a lay investor buying into each of the companies in the index individually and rebalancing them when required is a time consuming and tedious process. So, the easiest way to go about is to invest in an Exchange Traded Fund (ETF) or an index fund which is based on the Nifty 200 Momentum 30 Index. Both the ETF and index funds are instruments which are designed to replicate an underlying index and offer investor the return similar to that of the index minus tracking error and expenses.

Currently multiple fund houses – UTI and Motilal Oswal – have an offering based on the Nifty200 Momentum 30 index. Joining them now is ICICI Prudential Mutual Fund which is offering both index fund and ETF based on the momentum index. The NFO for the index fund and ETF is underway till August 02, 2022.

Taxation aspect

Since both index fund and ETF qualifies as equity oriented schemes, any investment in these funds will be considered as long term if held for 12 months or more and profits on such units will be taxed at a flat rate of 10% after excluding the initial Rs. 1 lakh of long term capital gains accounted for all listed shares and equity schemes taken together. If sold before completion of 12 months, the profits will be treated as short term capital gains which get taxed at a flat rate of 15%.

To conclude, if you are an investor with a long term investment orientation and is looking to capitalize from momentum investing, then these offerings be it an index fund or an ETF based on the Nifty200 Momentum 30 index will be an interesting investment option.

(Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail.com and @jainbalwant on Twitter.)

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.timesnownews.com.)