“Momentum” – the word has a certain charm, a positive reinforcement, a drive to deliver. Add that word to a mutual fund scheme name and you have got a winner.
Wait, isn’t that the promise of our new fund too!
“Keep your winners and weed out the losers.” Or, as the UTI Nifty 200 Momentum 30 Index Fund suggests – “Cut short your losses and let your profits run.”
That sounds like an investor utopia where the portfolio has only one direction to go – up and to the right.
Has UTI Nifty 200 Momentum 30 Index Fund come to give you the ticket to this super ride?
Let’s find out.
What is the Nifty 200 Momentum 30 Index?
Using the information provided in the NSE document on its Nifty200 Momentum 30 Index:
Momentum refers to the tendency of stock price trends to persist – stocks that have outperformed recently are likely to continue to outperform, and vice versa.
In short, you want to ride the winners, the stocks that are currently in favor, are attracting money and rising higher.
The Nifty 200 Momentum 30 Index aims to track the performance of the top 30 companies within the Nifty 200 Index selected based on their normalized momentum score.
The normalized momentum score for each company is determined based on its 6-month and 12-month price returns, 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. (Source: NSE index strategy document)
Put simply, it means that we will watch which 30 stocks of the Nifty 200 index have been rising faster over 6 months and 12 month period, arrive at some sort of an average (adjusted for volatility), and then use their market cap x momentum score to assign a weightage in the portfolio.
The fund intends to cap weightage to 5% or 5 times the index weigh with rebalancing every 6 months.
What About UTI Nifty 200 Momentum 30 Index Fund?
Well, my friend, the thing is that based on the numbers, it is bound to make any investors gape. On a backtested results, this momentum strategy shows a higher return than say a Nifty 50 or Nifty 200 index.
The momentum index has grown 16 times (including dividends) from April 1, 2005, while the Nifty 200 has gone up 12 times. (Note, this only points to point returns assuming you invested on April 1, 2005)
I am not using the Nifty 50 here, which is a pure large-cap index. Since the base index is Nifty 200, we will just stick to that.
Given the passive nature of the upcoming fund, it will come at a low cost and, with the MF structure, will also absorb any tax impact due to its very frequent changes.
If you were to deploy a momentum strategy yourself, the frequency of transactions would have caused your short-term capital gains or business income, leading to higher taxes. With the fund, if you hold for more than 1 year, you pay only 10% on the gains.
Now, as investors, our sole purpose is to chase high tax-efficient returns. So, why not?
Yes, Why Not This Fund?
The faster a thing goes up, the faster it can come down. This index and the fund will be no stranger to volatility, worse than others if I can put it that way. That’s the nature of Momentum. (See, it’s not all rosy!)
In the image above, the March 2020 period is highlighted with a circle. At that time, investors panicked with just their large-cap funds. This one would have made you skip a few heartbeats.
Can You Take This Ride?
Nifty 200 Index, which has a lot more midcap stocks in it, looks docile in comparison.
Even the sectoral composition of the index is concentrated. As per the UTI MF presentation, as of Jan 29, 2021, 61% of the index is invested in just IT, Consumer Goods, and Pharma socks.
Hey, But what? Just look at the damn performance.
Precisely, if that is all matters to you.
The investor who can include this fund in their portfolio is someone who says – “I don’t care how you drive or which route you take, just get me there, FAST! Even if you have to hit someone on the way, I am fine.”
Passive / Index investing is at the ultimate surrender to the wisdom of the markets. Looks like there is a Fast Track Club there, which you can enter via the Momentum index.
Remember, it comes at a cost – Volatility!
It is easy to say the word than to live it through!