MOMENTUM DOESN’T just belong to athletes. In the world of investing, it is a force of its own. Think of a fast-moving train. The more ground it covers, the more power it gains. That is momentum in action. In investing, momentum refers to the tendency of winning stocks to keep winning, and laggards to continue lagging at least for a while.
What it is
Momentum investing is the art and science of spotting stocks that are already doing well and are likely to continue their upward journey. But it’s more than just chasing high-flyers. It’s a disciplined strategy that blends trend-following with fundamental insight.
In simple terms, it means owning stocks that are rising either due to price trends, earnings growth, or positive analyst upgrades. One needs to step away too when that momentum fades. There’s no emotion, no attachment, just a data-backed, trend-driven discipline.
This strategy operates on a simple belief: “Recent winners tend to stay winners for a while.”
Why it works
Trends don’t just appear and vanish overnight. Once a strong earnings or price trend sets in, it often persists for months or even years. Consider the pharma sector: between FY16 and FY20, earnings of India’s top pharma companies declined, and prices followed. Post-COVID, as earnings rebounded sharply, so did the stock prices, creating a multi-year opportunity for momentum strategies to thrive.
One of the biggest advantages of momentum investing is that it guards investors against themselves. The disposition effect i.e., a tendency to sell winners too soon and hold onto losers, often hurts portfolios and returns. Momentum investing flips this on its head. It rides the winners and cuts the dead weight, removing emotion from decision-making.
Momentum’s two faces
While price momentum grabs attention, there’s a quieter, more durable cousin called earnings momentum. A company that consistently beats earnings estimates or sees upgrades from analysts tends to experience a more sustainable rally.
Take the case of a leading paint company. Due to COVID trigger for home improvement, it posted 46% earnings growth, leading to a 132 per cent rise in stock price, while the broader market returned only 66 per cent over the same period. This wasn’t luck. It was earnings-led momentum at play.
Similarly, in India’s top IT firms, a 18 per cent jump in earnings between FY21–22 translated into a 49 per cent rally in stock prices, beating the broader market’s 36 per cent gain. Momentum backed by real performance is hard to ignore.
Adapt across styles and cycles
Momentum doesn’t stick to one “style” of investing. It flows from value to growth to quality, based on where the market is heading. During the European debt crisis, for example, momentum shifted toward low-risk and high-quality stocks as market stress rose.
In contrast, after the 2014 election in India, optimism around reforms and growth drove a sharp pivot toward growth-oriented names. Momentum investing naturally picked up this shift and adapted without any manual intervention.
Who should consider momentum investing
If you want a portfolio that adjusts with the market, captures emerging winners, and avoids emotional decision-making, momentum investing offers a powerful approach. It is not for the ultra-conservative, nor the reckless speculator. Momentum investing is about riding waves, not fighting them. It does not promise perfection, but it offers a practical way to align with what’s working, as long as it’s working.
In a world full of noise, momentum investing listens to signals. And sometimes, that is all you need to stay ahead.
The Mutual Fzund Route
Identifying stocks exhibiting sustainable momentum—driven by earnings upgrades or price performance—necessitates rigorous fundamental and technical analysis. Momentum-focused mutual funds offer a convenient way to invest in stocks with strong upward trends, managed by experienced professionals. One such offering is the ICICI Prudential Active Momentum Fund, an open-ended fund selecting stocks based on earnings or price momentum. The New Fund Offer (NFO) period runs from July 08, 2025, to July 22, 2025.
The writer is AMFI Registered Mutual Fund Distributor