NIFTY200 Momentum Factor: Smart Beta Investing For A Long-Term Outperformer

"Momentum" factor is an interesting variant in the evolving Smart Beta space. A Momentum-based strategy selects stocks that have experienced strong performance in the recent past. While Momentum indices such as the NIFTY200 Momentum 30 come along with higher volatility than broad-market indices such as NIFTY 200 Index and NIFTY 50 Index, they have outperformed these indices over the last 18 years. Thus, an investor could avail this opportunity by investing in our ongoing NFO of HDFC NIFTY200 Momentum 30 Index Fund.

Smart Beta Investing is a passively managed strategy in which the stock selection and weighting are based on pre- determined factors such as Equal Weight, Quality, Value, Growth, Momentum and Low Volatility. The use of such factors, rather than size (market cap), make these investing strategies more nuanced and presents an opportunity to provide better risk-adjusted returns than broad market cap weighted indices.

Momentum refers to the tendency of stock price trends to persist - the premise that stocks that have outperformed recently are likely to continue to outperform, and vice-versa. The Momentum factor's ability to generate better returns in equity markets has earned it the title 'the premier anomaly', according to Eugene Fama (Father of Efficient Market Hypothesis).

NSE Indices has developed the "NIFTY200 Momentum 30 Index", which aims to track the performance of the top 30 companies within the NIFTY 200 Index selected based on their normalised Momentum score. The normalised Momentum score for each company is determined based on its 6-month and 12-month price return, adjusted for its daily price volatility. Stock weights are based on a combination of the stock's normalised momentum score and its free-float market capitalization.

With the Index rebalancing taking place on a semi-annual basis in June and December, the Index keeps adapting to changing market conditions. With such a dynamic allocation, the endeavour is to achieve a consistent exposure to the stock market winners, displaying strong momentum as shown below:

This adaptation to evolving market conditions has resulted in rolling returns of NIFTY200 Momentum 30 Index to outperform other broad-market indices like NIFTY 200 TRI and NIFTY 50 TRI over 1, 3, 5 and 10 years (as on January 31, 2024). As seen in chart 2, this has led to a very strong cumulative outperformance over the broader based indices such as NIFTY 200 Index and NIFTY 50 Index.

Since NIFTY200 Momentum 30 Index tracks the performance of the top 30 companies within the NIFTY 200 selected based on their recent momentum, its volatility is higher than the other broad-market indices NIFTY 200 TRI and NIFTY 50 TRI. In fact, in periods of market drawdowns, momentum indices could see higher drawdowns.

A word of caution to investors is that this strategy works if one constantly stays true to the momentum factor, one cannot buy momentum stocks of today and hold for a long period of time. Therefore, a fund following this strategy in a dynamic manner and investing in these changing winners is ideal, rather than individually buying and holding stocks.

The attributes discussed above suggest that this strategy could add value to an investor's portfolio. One way to avail this opportunity could be investing in our new fund offering (NFO), HDFC NIFTY200 Momentum 30 Index Fund. This Fund aims to replicate / track NIFTY200 Momentum 30 Index TRI, thereby providing an investor a low-cost and dynamic route to better risk-adjusted returns than market cap weighted indices. The NFO period will close on February 23, 2024.