Nippon India Nifty 500 Momentum 50 Index Fund Explained | Interview with Arun Sundaresan

Summary

In this discussion, Arun Sundas from Nippon India Mutual Fund and Sneha Suri from Value Research delve into the Nifty 500 Momentum 50 Index Fund, a new investment strategy focusing on stocks with strong upward price trends. Unlike traditional value investing, momentum investing involves buying high-performing stocks with the expectation of further increases. The fund, which selects 50 stocks from the Nifty 500 universe, is rebalanced semi-annually to adapt to market changes. It offers diversification across market caps and sectors, making it a potentially strong addition to equity investors' portfolios seeking aggressive risk-return profiles.

Takeaways

• 😀 The Nifty 500 Momentum 50 Index Fund by Nepon India is a momentum-based investment strategy that focuses on identifying and investing in the 50 top-performing stocks from the broader Nifty 500 universe.
• 📈 Momentum investing is a strategy that involves buying stocks that have been performing well in the hope that they will continue to rise, contrasting with traditional 'buy low, sell high' approaches.
• 🏦 The fund is differentiated from other similar strategies by investing across the entire Nifty 500, covering large, mid, and small-cap stocks, rather than focusing on a specific segment of the market.
• 🔍 The selection process for the fund involves a momentum ratio calculation based on the past 6 months and 1 year price returns, adjusted for volatility, to identify the top 50 stocks.
• 🔄 The index is rebalanced twice a year, in June and December, to ensure the portfolio reflects the current market momentum and to manage risks associated with rapid changes in stock performance.
• 📊 The fund's risk-return profile is strong, with back-tested data showing an average three-year rolling return close to 20%, outperforming the broader Nifty 500 index.
• 🌐 The strategy has shown resilience in various market conditions, including bear markets, although it's important to note past performance is not indicative of future results.
• 💡 The fund is suitable for equity investors seeking an aggressive risk-return profile and is considered an 'all-weather' proposition due to its diversified nature and consistent performance.
• 💼 Investors are advised to consider such strategies as a supplementary allocation, possibly 5-10% of their portfolio, to balance risk and potential returns.
• 📉 While the strategy has shown potential for sustained returns, it's also subject to higher volatility, and investors should be aware of the risks, especially in extreme market conditions like 2008-2009.

Q & A

What is the Nifty 500 Momentum 50 Index Fund and how does it differ from traditional investing?

The Nifty 500 Momentum 50 Index Fund is an index fund that focuses on replicating the performance of the Nifty 500 index, but with a momentum-based strategy. Unlike traditional investing which involves buying low in hopes of selling high, momentum investing identifies stocks that are already performing well and are likely to continue doing so, buying high with the expectation of selling even higher.

How is the Nifty 500 Momentum 50 Index Fund different from other momentum-based funds?

The Nifty 500 Momentum 50 Index Fund is unique in that it invests across the entire Nifty 500 index, covering large, mid, and small-cap stocks. This is different from other momentum funds that may focus on specific segments like Nifty 200 or midcap 150. It applies the momentum factor across the entire market, selecting 50 stocks based on their momentum.

What is the selection process for the top 50 stocks in the Nifty 500 Momentum 50 Index Fund?

The selection process for the top 50 stocks is based on price momentum, considering the last 6 months and one year price returns. The price is adjusted for volatility, and a momentum ratio is calculated. Stocks are then picked based on this ratio, with further refinements to ensure investability, such as excluding stocks with low volume or high promoter pledges.

How often is the Nifty 500 Momentum 50 Index Fund rebalanced and what impact does this have on the portfolio?

The index is rebalanced twice a year, in June and December. This rebalancing ensures that the portfolio quickly adapts to changing market conditions and momentum, leading to significant changes in the portfolio composition to reflect the current momentum in the market.

What is the historical performance of the Nifty 500 Momentum 50 Index Fund strategy?

According to the back-tested data, the strategy has shown a strong risk-return profile over 19 years. It has outperformed the Nifty 500 in 83% of the time over three-year rolling returns and almost 100% of the time over five-year rolling returns. The average three-year rolling return for the index is close to 20%, compared to 12.5% for Nifty 50 and Nifty 500.

How does the fund manage the risks associated with rapid changes in momentum?

The fund manages risks through its rebalancing frequency, which is every six months. This allows the fund to quickly react to changes in momentum, ensuring the portfolio reflects the current market trends. The dynamic nature of the strategy has shown to work well in different market conditions.

Who is the Nifty 500 Momentum 50 Index Fund best suited for?

The fund is best suited for equity investors seeking an aggressive risk-return profile and looking for a strategy that can potentially generate higher and consistent returns over the long term. It is a diversified strategy, investing across the entire market and is considered an all-weather proposition.

How should investors consider using the Nifty 500 Momentum 50 Index Fund as part of their broader investment strategy?

Investors can consider the Nifty 500 Momentum 50 Index Fund as a supplementary allocation, perhaps 5 to 10% of their portfolio, to benefit from the momentum strategy without significantly increasing their overall risk. It can be particularly appealing for those open to higher risks and looking for potentially higher returns.

What are the potential drawbacks of investing in the Nifty 500 Momentum 50 Index Fund?

While the strategy has shown strong historical performance, it is subject to higher volatility and can underperform in certain market conditions, such as during extreme market corrections. Investors should be aware of these risks and consider them when deciding to invest in a momentum-based fund.

How does the Nifty 500 Momentum 50 Index Fund's performance compare to other factor-based strategies?

The Nifty 500 Momentum 50 Index Fund has shown to outperform other factor-based strategies over the long term, with a higher average three-year rolling return compared to value-based, quality-based, and even midcap and small-cap strategies. However, it's important to note that past performance is not indicative of future results.