From peaks to crashes
In recent years, investors betting on momentum have seen the whole gamut of outcomes. The ‘buy high, sell higher’ mantra initially caught investors’ fancy amid the near-uninterrupted market uptick post the March 2020 outbreak of Covid-19. Momentum stole the limelight in 2021 with a 75.8% return, outperforming all other investing styles and trouncing the Nifty 500 index (16.5%). After slipping up briefly in 2022 (-9.3%), momentum roared back into form in 2023 (46%) and 2024 (25.6%), emerging among the charttoppers and leaving the Nifty 500 index (25.2% and 15%) trailing in its wake.
But towards the end of 2024, investors discovered that momentum is no free lunch. With the market cracking under the weight of steep valuations, tepid earnings growth and trade wars, momentum investors were in for a shock. The Nifty200 Momentum 30 index slipped 31% from 26 September 2024 to 7 April 2025. Comparatively, Nifty 500 lost 18%. Karthik Kumar, Fund Manager at Axis Mutual Fund, remarks, “Momentum has exhibited volatility it hadn’t seen for quite some time. Whenever a sudden shift in the market occurs, momentum typically takes time to reflect the newer realities, and exhibits a lag in such periods.” Many momentum portfolios were skewed towards value stocks just as the market turned, leading to sharp underperformance.
Momentum strategies have gained sharply amid market recovery
After underperforming over six months, momentum is regaining ground.
But the tide has turned again. With the stock market rebounding smartly, the momentum trade is soaring high. Since 7 April 2025, the Nifty200 Momentum 30 index has gained 11% even as the Nifty 500 index gained 7.8%. Arihant Bardia, CIO, Valtrust, observes, “Momentum investors have now seen a complete cycle. Many who got in previously on sharp outperformance have now also seen it lag the market.”
Coming out of the storm
So what does momentum have in store for investors now? Some experts reckon the time is ripe for momentum to kick into higher gear. Bardia asserts, “Momentum typically starts outperforming when the market recovers from a sharp drawdown and breaches previous highs.” He reckons the drawdown is behind us and the market is on recovery path. The frontline BSE Sensex index is now only 4% off its previous peak of 85,978 even as the BSE Midcap and BSE Smallcap indices are still 12% and 15.8% shy of their respective highs—but gaining ground quickly.
Historical evidence supports momentum strategies at such junctures. However, betting on continued upswing in momentum on this evidence alone may backfire also, warn experts. “Momentum will do well if market trends evolve gradually. But sharp changes in trends will lead to higher churn in winning stocks, which could temper returns,” cautions Kumar. To be sure, the market fog has seemingly dissipated in recent weeks. The ceasefire between India and Pakistan, the cooldown in US-China trade animosity and the imminent Ukraine-Russia peace talks provide a solid platform for further market upside. However, other surprises may yet derail the fragile recovery.
Tackling the beast
Experts maintain that investors should avoid timing their pursuit of momentum. The idea behind momentum investing is not to try and catch the top or the bottom of the market or a stock, but to simply ride an established trend. Investors must simply let momentum do what it does best. Any good momentum strategy adapts to the evolving market realities, latching on to the winners and letting go of the losers.
“The transition happens with a lag, but momentum is adept at changing its form in a way that reflects the market’s current preferences,” insists Kumar. While momentum can cut deep amid a market correction, it is proven to deliver superior outcomes over longer periods of time. Bardia observes, “Momentum tends to exhibit higher volatility but the risk-adjusted return over longer periods tends to be much higher. The outcomes typically compensate for the higher risk taken.” He suggests investing in a staggered manner and staying committed to the chosen momentum strategy for threefive years to make the most of its capabilities.
Kumar points out that risk in momentum strategies is equivalent to any small cap offering, and so should be pursued through the lens of asset allocation. Such factor-based funds should form part of the satellite portfolio, not the core.
Further, active momentum strategies may prove better at containing downside risk. Typically, momentum is a fast moving signal that requires deft portfolio manoeuvring. Index-driven momentum funds are slow to react as these embrace longer look-back periods (for price trends) and slower portfolio rebalancing. Actively run momentum strategies, on the other hand, capture both near-term and long-term price trends and rebalance more frequently. This enables quicker transitions, reduces the signal decay and cushions the downside better.