Momentum-focused mutual funds

Equities are driven by a multiplicity of factors. These factors or characteristics that are thought to move these securities can vary. Momentum, low volatility, value, quality and growth are some such factors.

- KISHORE KRISHNA T.K.

Think back to the equity markets from 2002-2007 and more recently to 2020-2025. Indices were mostly on a heady rally in both these phases (earlier and also in recent years), though there have been odd short periods of dips in those years.

When we invest based on the expectation that the price trend of a particular investment is likely to persist on its upward trajectory, like mentioned above, we are essentially investing based on momentum.

Making trends work

Now, while following the momentum trends it is important to remove any biases or emotions in the buying and selling decisions by adopting a disciplined process.

Disposition effect—selling securities too soon immediately after a short spell positive price action and holding on to loss-making assets—is to be avoided.

A good momentum strategy would enable investors to exit at or close to the peak price levels of a security, thus realising the maximum potential. So, riding on winning trends for longer is important.