Momentum Funds Plunge Over 20% as Market Selloff Hits Hard

Once High-Flying Funds Now Among Worst Performers Amid Market Downturn

Momentum funds, once star performers delivering double-digit gains, have suffered deep losses over the past three months. The recent market correction has led to a sharp decline in these funds, with most falling more than 20%. Financial experts caution that investors should approach momentum funds with a long-term horizon of at least one year due to their high-risk nature.

Highlights of Momentum Fund Performance:

• Top momentum funds have plunged 20-27% in the last three to six months.
• Passive momentum funds have been hit harder than actively managed ones.
• Market downturns expose momentum funds to increased volatility and higher risk.
• Experts advise investors to consider a minimum 5-year horizon for better returns.

Momentum Funds Face Heavy Losses as Market Trends Shift

Momentum funds, which previously outperformed the broader market and delivered significantly higher returns than the Nifty 50 Index Fund, are now among the worst performers.

Analysts attribute this underperformance to the inherent nature of momentum investing, which thrives in bullish cycles when stocks are rallying. These funds typically invest in stocks with strong price momentum, making them highly sensitive to market corrections.

Worst-Hit Momentum Funds: Steep Declines Over 3-Month Period

Nearly 20 momentum funds have faced significant losses, with some of the biggest declines in the last three months:

Major Large-Cap Momentum Funds Declining Over 27%:

• Bandhan Nifty 500 Momentum 50 Index Fund
• Motilal Oswal Nifty 500 Momentum 50 ETF
• Nippon India Nifty 500 Momentum 50 Index Fund
• Motilal Oswal Nifty 500 Momentum 50 Fund

Mid-Cap Momentum Funds Down More Than 24%:

• Tata Nifty MidCap 150 Momentum 50 Index Fund
• Edelweiss Nifty MidCap 150 Momentum 50 Index Fund
• Kotak Nifty MidCap 150 Momentum 50 Index Fund

Other momentum funds have recorded declines ranging from 13% to 23%, making them one of the worst-performing fund categories in the current market scenario.

Why Are Momentum Funds Struggling?

Momentum funds tend to chase stocks that have been rising rapidly. However, when the market corrects, these stocks struggle, leading to significant underperformance.

According to independent market analyst Deepak Jasani, momentum investing works best in a bullish market, particularly when large-cap stocks are rallying. When broader markets weaken, momentum funds face sharp declines, as their stock selection is more technical than fundamental.

In a falling market, momentum becomes short-lived, making it difficult for fund managers to identify new stocks to enter. Many momentum stocks fall rapidly once market trends reverse, forcing fund managers to either hold on and wait for a recovery or exit at a loss.

Why Some Momentum Funds Fell More Than Others

According to Nirav Karkera, Head of Research at Fisdom, most momentum funds have high beta exposure, meaning they are highly sensitive to market cycles. While these funds tend to outperform during bull markets, their long-only structure makes them highly vulnerable during corrections.

Actively managed momentum funds have fallen less compared to passively managed ones.

• Passively managed momentum funds take longer to adjust to changing market conditions since they rebalance periodically based on set criteria.
• Actively managed momentum funds rebalance more frequently, allowing them to reduce exposure to declining stocks faster.

What Should Investors Do?

Rupesh Bhansali, Head of Mutual Funds at GEPL Capital, warns that momentum funds are inherently high-risk investments. He suggests that investors should only consider them with a long-term horizon of more than a year.

Key recommendations from market experts:

• Investors with a short-term view should avoid momentum funds due to high volatility.
• Those preferring systematic investing with lower costs should consider passive index funds for a 5-year investment horizon.
• Corrective market phases can be used as buying opportunities for long-term investors.

Despite the current slump, experts believe that momentum funds could recover in the second half of the year if the broader market rebounds. However, their performance will continue to be closely linked to market cycles, requiring investors to remain patient and manage risk accordingly.