Momentum Mutual Funds - Features,
Benefits, & Risks (2025)

There are many types of Mutual Funds. Different Mutual Fund follows different strategies of investment for example, Growth, Quality, Value etc. One of the investment strategies is “Momentum”.

Momentum Mutual Funds focus on stocks with strong upward price trends. It assumes that stocks that have done well in recent times are expected to continue doing well in the future. These mutual funds look to identify stocks that have done well in recent times as compared to the broader market or those showing steady price growth over a certain duration.

Quantitative analysis is used to identify and invest in these stocks based on factors such as past price movements, trading volume, relative strength, and so on.  Let's discover more about them below.

Features of Momentum Mutual Funds:

Now that you've understood what a momentum fund is, here are some of its key characteristics.

• These funds invest in high-performing stocks to capitalize on market trends. 
• Higher gains are possible, but market corrections can lead to increased volatility and losses. 
• Prioritizing short-term price patterns over long-term analysis is crucial to riding the momentum. 
• Dynamic weighting is another feature of momentum funds. Some funds change the way they allocate their portfolios based on how the market changes. The idea is to find fresh investment opportunities when the market shifts. 
• While some funds may focus on specific stocks or sectors, others may aim for portfolio diversity
• The majority of these funds are actively managed by fund managers who base their choices about which stocks to buy or sell on their own evaluation of market trends.  To ensure a more passive investing strategy, some of them are designed to track just a specific momentum index.  

Advantages of Investing in Momentum Mutual Funds:

Following are the advantages of investing in Momentum Mutual Funds/ stocks. 

1. Possibility of generating Higher Returns in Bull Markets: 

Momentum Mutual funds tend to perform well in strong bull market because they invest in stocks that are already showing an upward trend. Considering the past price patterns or discovering stocks with significant short- to medium-growth potential are two ways to make money. As a result, there is a greater chance of profit when utilizing short- to medium-term trends.

2. Eliminating Emotional Biases: 

One major benefits of active trading is that it can be used to take advantage of market inefficiencies and generate fresh opportunities for profit. In addition, the overall strategy is based on metrics and price trends, which eliminates emotional biases when choosing stocks.

3. Diversifying the Portfolio:

Portfolio diversification without relying entirely on market capitalization or other value factors is another benefit along with flexibility in crafting momentum strategies and responding to market conditions dynamically.

Risks and Considerations while investing in Momentum Mutual Funds:

Here are a few things to be aware of when investing in momentum funds.

Risk of High Volatility: Due to market's frequent swings and the possibility of losing money during corrections, investors must deal with increased volatility. This is due to the fact that these funds rely mostly on short-term trends. 

Unsuitable for Sideways or Bearish Markets: As the stock prices move in a narrower band with no obvious signs of upward or downward momentum, fund performance may also suffer in range-bound or sideways markets.  Additionally, they have historically performed poorly in bad markets, frequently seeing significant declines during downturns.

Higher Cost: As the fund managers constantly change the asset mix to capitalize on momentum in the short to medium term, churn rates are greater.  Higher transaction costs and expense ratios might also result from frequent asset purchases and sales.

Needs Extensive study & Accurate Timing: Investing in these funds demands a great deal of market study and performance tracking of individual stocks. Accurate market timing is also a factor.

There is also an Index Fund called “Nifty 200 Momentum 30”

The Nifty200 Momentum 30 Index tracks the performance of 30 high momentum stocks across large and mid-cap stocks. It has stocks from different sectors i.e. Automobile, Capital Goods, Consumer, Healthcare, Financial Services, Power, Metal etc.

Should You Invest in Momentum Mutual Funds?

Momentum Mutual funds are an option for investors with a higher risk tolerance.  Additionally, investors seeking to take advantage of the market's short to medium-term growth prospects may consider investing. If you want to diversify your portfolio more aggressively, it is usually advised that you have a thorough understanding of market cycles and patterns.

Conclusion

Momentum funds can be a good option for investors who are comfortable taking higher risks and can handle short-term market fluctuations. They are suitable for those looking to aggressively diversify their portfolio and have a longer investment horizon of more than 5 to 7 years.

However, it's important to understand the risks involved, especially during market corrections or downturns, as these funds can be quite volatile. With the right strategy and proper management, momentum mutual funds can add significant value to your investment portfolio. It’s always wise to seek expert advice before investing.