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.

Outlines

00:00

📈 Introduction to Nifty 500 Momentum 50 Index Fund

The discussion begins with an introduction to the Nifty 500 Momentum 50 Index Fund by Nipon India Mutual Fund. Arun Sundas, Head of ETF at Nipon India, explains the concept of momentum investing, which involves buying stocks that are already performing well with the expectation that they will continue to do so. This strategy is different from traditional investing, which focuses on buying low and selling high. The fund aims to replicate the Nifty 500 index, applying the momentum factor to select 50 stocks from the entire market. The conversation highlights the fund's uniqueness compared to other momentum-based funds, as it invests across the entire spectrum of the market, including large, mid, and small-cap stocks.

05:00

🔍 Selection Process and Rebalancing of the Index

Arun Sundas elaborates on the selection process for the top 50 stocks from the Nifty 500 universe, focusing on price momentum over the past six months and one year, adjusted for volatility. The stocks are chosen based on their momentum ratio, which is the price divided by the standard deviation. The fund also employs a tilt-weighted methodology based on free float market cap, ensuring a diversified portfolio. The index is rebalanced twice a year, in June and December, to reflect changes in momentum and maintain a dynamic portfolio. The discussion also touches on the fund's historical performance, showing a strong risk-return profile over different market conditions.

10:00

📊 Performance Analysis and Suitability for Investors

The conversation delves into the performance of the Nifty 500 Momentum 50 Index Fund over the past 19 years, highlighting its ability to outperform the broader market in various market conditions. The fund has shown an average three-year rolling return close to 20%, outperforming Nifty 50, Nifty 500, mid-cap, and small-cap indices. It has also demonstrated resilience in bear markets, performing in line or better during difficult years. Arun suggests that the fund is suitable for a wide range of equity investors seeking a diversified, aggressive strategy with the potential for higher returns. The fund's diversification and rebalancing strategy make it an all-weather proposition.

15:02

🤔 Investor Considerations and Strategy Adoption

Snas Suri, a fund analyst, advises investors to consider momentum-based strategies like the Nifty 500 Momentum 50 Index Fund as a supplementary allocation, possibly 5-10% of their portfolio. While the historical back-tested data is promising, investors should be aware of the strategy's higher volatility and the potential for underperformance during extreme market corrections. The discussion concludes with a recommendation for investors to carefully evaluate their risk tolerance and investment goals before adopting such strategies, suggesting that momentum investing could be a valuable addition to a well-diversified portfolio.

Keywords

💡Momentum Investing

Momentum investing is a strategy that involves buying stocks that have had significant price increases over a certain period, with the expectation that the upward trend will continue. In the video, Arun Sundas explains that this strategy is counterintuitive to traditional 'buy low, sell high' investing, as it involves 'buying high and selling even higher.' The Nifty 500 Momentum 50 Index Fund discussed in the video is an example of a momentum-based fund, aiming to capitalize on this approach.

💡Nifty 500

The Nifty 500 is an index that represents a broad spectrum of Indian companies across various market capitalizations. In the context of the video, the Nifty 500 serves as the universe from which the Nifty 500 Momentum 50 Index Fund selects its stocks. The fund applies the momentum factor across this entire index to pick the top 50 stocks, making it a comprehensive representation of the market's momentum plays.

💡Index Fund

An index fund is a type of mutual fund or exchange-traded fund (ETF) designed to replicate the performance of a specific index, such as the Nifty 500. The video discusses the Nifty 500 Momentum 50 Index Fund, which is an index fund that tracks the performance of the top 50 momentum stocks within the Nifty 500 index, aiming to provide investors with exposure to the momentum investing strategy.

💡Risk-Return Profile

The risk-return profile refers to the potential for gains and losses associated with an investment, reflecting the level of risk an investor assumes for a given expected return. In the video, the Nifty 500 Momentum 50 Index Fund is described as having a strong risk-return profile, suggesting that it has historically provided high returns with an acceptable level of risk, as evidenced by its back-tested data.

💡Rebalancing

Rebalancing is the process of adjusting the weightings of the components in an investment portfolio to maintain the desired asset allocation. The video mentions that the index fund is rebalanced twice a year, which helps the fund to adapt to changing market conditions by reflecting the current momentum in different stocks and sectors.

💡Momentum Ratio

The momentum ratio is a calculation used to identify stocks with strong price performance over a specified period, typically adjusted for volatility. In the video, Arun Sundas explains that the momentum ratio is calculated by dividing the stock's price by its standard deviation to select the top 50 stocks for the index fund, highlighting the fund's focus on past performance as a predictor of future success.

💡Free Float Market Cap

Free float market cap refers to the market capitalization of a company's shares that are available for trading by the public. In the video, it is mentioned that the Nifty 500 Momentum 50 Index Fund uses a 'tilt weighting methodology' based on free float market cap, which means that larger stocks with higher momentum will have a higher weight in the portfolio, reflecting their significance in the market.

💡Diversification

Diversification is a risk management strategy that involves spreading investments across various financial instruments, industries, and other categories to reduce the impact of any single investment's poor performance. The video emphasizes that the Nifty 500 Momentum 50 Index Fund is well-diversified, as it invests across the entire market spectrum and includes 50 stocks, which helps to mitigate risk.

💡Back-Tested Data

Back-tested data refers to the historical performance of an investment strategy based on past market data. The video discusses the back-tested data of the Nifty 500 Momentum 50 Index Fund, which shows that the strategy has historically outperformed the broader market indices like Nifty 500 in various market conditions over a 19-year period.

💡All-Weather Proposition

An all-weather proposition is an investment strategy designed to perform well in various market conditions, both bullish and bearish. In the video, Arun Sundas suggests that the Nifty 500 Momentum 50 Index Fund could be considered an all-weather proposition due to its consistent performance across different market cycles, making it suitable for a wide range of equity investors.

Highlights

Introduction to the Nifty 500 Momentum 50 Index Fund and its approach to investing.

Explanation of momentum investing and its contrast to traditional buy-low-sell-high strategy.

How the Nifty 500 Momentum 50 Index Fund selects its portfolio of stocks.

Distinction of the Nifty 500 Momentum 50 Index Fund from other momentum-based funds.

Analyst's perspective on the Momentum 50 Index and its comparison to other strategies.

Details on the selection process for the top 50 stocks from the Nifty 500 universe.

Frequency of index rebalancing and its impact on the portfolio.

Discussion on the fund's risk management in the face of rapid changes in momentum.

Long-term performance of momentum investing in Indian markets.

Suitability of the fund for different types of investors and its role in a broader investment strategy.

Historical performance data and its implications for future investment decisions.

How the fund's diversification across market caps and sectors can benefit investors.

The fund's potential as an all-weather investment strategy.

Advice for investors considering momentum funds as part of their portfolio.

The importance of considering real-time market conditions when investing in momentum funds.

Final thoughts and conclusions from the discussion on the Nifty 500 Momentum 50 Index Fund.

Transcripts

[Music]

hello and welcome to today's discussion

on the newly launched nepon India Nifty

500 momentum 50 Index Fund to break it

down in detail I'm pleased to have with

me Arun sundas head of ETF at nipon

India mutual fund and snas Suri lead

fund Analyst at Value research welcome

both of you hi rir happy to be on the

show thank you uh Arun let me to you

first could you start by giving us an

overview of what the Nifty 500 momentum

50 Index Fund is all about and how is

this different from other momentum based

funds out there so traditional investing

generally is about uh buying stocks or

any any investment at a lower price so

you buy low with the hope that it'll

appreciate and you'll be able to sell

high so that's the traditional approach

uh contrary to this against this

approach roach uh the momentum uh style

of investing is very different you try

and identify stocks which are already

doing well probably they're already you

know pricey or they are high with the

hope that it will go even higher so you

buy high and sell even higher that's a

concept of momentum it may be

counterintuitive but as I'll explain uh

it had worked at many circumstances and

generated phenomenal uh returns over a

period of time so the U uh npon India

Nifty 500 momentum 50 Index Fund uh the

name suggest is an index format where

we'll be replicating this particular

index so the universe is Nifty 500 so on

the entire Market the momentum Factor

will be applied and 50 stocks will be uh

picked up based on that so that's the

concept of this particular fund and if

you could also explain how is it uh you

know any different from the uh similar

momentum base funds that are already out

there sure so uh this is not entirely

first of its kind there is another

strategy which is currently on as well

uh but as of now there are a few

strategies in the market which is on uh

the 200 uh Nifty 200 uh so that's one

strategy there there are also a couple

of strategies on uh the midcap 150 so

both of them focus on a particular part

of the market whereas this will invest

across the entire uh 500 Nifty 500 which

means that across large mid and small

cap regardless of you know which parts

of the market you apply the momentum and

uh wherever momentum is working it gets

picked up so that's how this is

different from the existing uh momentum

strategies right snea from your

perspective how does the momentum 50

index St stack up against other

strategies uh also what makes it stand

out from an analyst point of view if you

could explain that sure so so uh broadly

as Aon mentioned this index uh pick

stocks which have been appreciating

sharply over a short period that is are

experiencing that momentum a strong

price trend so this strategy benefits

from the strong get stronger principle

where you know stocks with upward price

trends tend to continue performing well

in the near term this is due to that

focus on price trends uh you know rather

than the conventional driven uh stock

picking like Arun mentioned of course

some checks and balances are buil WR

into the process of these strategies

since they pick stocks from their bigger

parent indices the Nifty 500 being the

one for this particular fund talking

about other factor-based strategy

indices that we have they also select

stocks from a particular index based on

different rules so we have value based

funds quality based funds Etc so

different funds use these factors

differently some of them use them in

isolation that is you know basing One

Fund uh basing a fund on one factor or

let's say in combination to create a

unique basket of stocks so notably each

factor has its moment in the spotlight

and dominance mostly rotates over time

while momentum can deliver dramatic

returns it's also subject to a higher

volatility in the short term and that

can be seen in its back tested data of

you know minimum one year Rolling

returns which stands at a negative

60% and of course like uh Arun mentioned

currently there are no established fund

struct in the Nifty 500 momentum 50

index with only two funds in their nfo

period including the one from nepon

India that we are discussing but uh you

know based on the funds tracking the

Nifty 200 moment momentum 30 index it is

fair to say that so far the returns have

been appealing but the strategy is

actually yet to see uh any major bearish

phases since these funds have only been

around since uh 2021 but the funds have

so far been tracking the index uh

relatively

well right uh Aron if you could explain

what is the selection process like how

do you go about selecting top 50 stocks

from the broader uh Nifty 500 universe

so the um uh the definition of momentum

is actually price momentum so the last 6

months and one year price returns are

considered but not just only the price

the price is adjusted for volatility uh

the price is divided by the standard

deviation so to say and uh this uh

number is called as momentum ratio so

that's primarily used for picking up

stocks of course there are like what s

mentioned there are finer details uh we

we eliminate a few stocks based on

certain parameters like you know if it

is low on uh volume and you know the

promoter pledges on the highest side Etc

to ensure that uh the universe and

eventually the number of stocks we

select are investable so that's broadly

the uh method um by the end of the day

what it does is it purely goes by the

past return it does not look into

factors like quality factors like what

has been the return on earnings or even

valuation metrics like what is the p pb

Etc it goes simply by what has done well

having said that while this may give an

impression that this goes only by price

and therefore you know uh it may pick up

fundamentally weak companies but the uh

end result because U you know your

picking up something which is doing well

and those stocks could actually be doing

well for fundamentally strong reasons so

uh you you can't say that you know the

momentum strategy does not pick up

fundamentally good companies it can uh

so happen that you know the portfolio

could be relatively

strong right and how how often is the

index rebalanced and also if you could

walk us through how that rebalancing

affects the overall portfolio sure so

the index is rebalanced twice once in

June and ones in December I did mention

to you about the methodology where to

start with the momentum scores are

considered that's how the 50 stocks are

picked up uh but once it's picked up the

waiting is actually done basis the free

float market cap so we call this tilt

waiting methodology um uh in simple

words to say that suppose a big stock

has a certain momentum and a small cap

stock also has equal momentum the

biggest stock will get

higher weight because you know it is

having a higher free flow so you will

have to see this in relation to where

the market is Nifty 500 and in relation

to it the different parts of the market

you know where you have higher momentum

that's what gets uh picked up uh so

we've seen um uh data while while SN

mentioned that some of the existing

strategies are available only from 21

the index itself the data is available

way back from 2005 so we have almost 19

years of data and we've seen how the

index the strategy based on back tested

results how this is done over different

points in time and different parts of

the I mean different uh uh Market times

and you know the average Returns the

volatility and so on and so forth uh

this seems to be having a relatively

strong uh risk return

profile okay you mentioned that it has a

it seems to have a very strong uh risk

return profile but markets are cyclical

and momentum can shift quickly so how

does the fund prepare for or manage the

risks of rapid changes in

momentum the one is uh this rebalancing

frequency itself you know the six months

and um I mean every six Monon

rebalancing uh right and you also asked

this question how it impact the

portfolio in fact it seems to have

impacted positively in the sense that

because there is a frequent change uh

very quick to react in ter terms of you

know what is working and you know the

portfolio under goes significant change

to reflect you know the uh changing

momentum so uh that that's that's a

positive uh thing you know doesn't stick

on uh to the same portfolio for very

long what works regardless of market cap

regardless of you know the sectors and

themes that the various stocks could be

operating and it uh you know picks up so

it's been fairly U Dynamic and it seemed

to have worked in different market

conditions here

all right and do you think momentum

investing will hold up as a strong

strategy in the Indian markets over the

long term or are there any are there

certain market conditions where it works

best so generally when you think about

momentum you tend to think that these

are bull market products and you know it

may work only when markets are having

the momentum so to say uh but um the

data actually suggest um a completely

different thing I did mention that 19

years of data is available so we looked

at not just the current Returns the last

one year or three year or five year

return so if you looked at the average

rolling return see for example the

threeyear average return at any point in

time you invested in the last 19 years

and you looked at the threeyear return

and what has been the average threeyear

return that's that's what you know we

mean by the average three-year rolling

return that number for this index is

close to 20% so just to give you a

perspective the equivalent number for

nifty 50 and Nifty 500 is 12 .5% so and

these are all cagr okay so what we

saying is there is almost a 7 and a

half% difference when compared to Nifty

500 even when compared to midcap and

small cap which are generally considered

to be more aggressive strategies uh so

mid cap is given close to about 15% for

the three-year average return small cap

is given close to 13 and a half 14% so

we talking about whether it is the Nifty

5500 midcap small cap the strategy 1 has

done phenomenally well so in this case

we talking about threeyear uh rolling

return similar is know the 5year story

as well this is point number one and uh

the second interesting um fact is more

than 80% of the time in fact to be

precise 83% of the times this is

outperformed Nifty 500 so that's a a big

number uh I'm sure you will appreciate

that over the last 19 years markets have

gone through various faes and for a

strategy to outperform uh the broader

markets in 80 83% in fact over 5ye

rolling return uh this number goes close

to 100% so while it might be perceived

that you know it might work in certain

market conditions the data seem to

suggest obviously these are past data

but the data seems to suggest that the

strategy has the potential to generate

far more sustained returns uh and you

know we noticed even in uh difficult

times like for example

20111 uh the markets fell by almost 26%

this actually fell lesser which means

that actually perform better than the

market likewise in 2013 2019 2020 all

these were difficult years for the

market the strategy actually either

performed in line or slightly better as

well so uh we may not be able to say

that this may not work in bare markets

by in large this seem to have worked but

having said that there will always be

faces for example we noticed in 2008 and

9 which were obviously on hindsight

extreme periods where markets corrected

very very sharply and then recovered

also very sharply during that period

this particular strategy underperformed

because momentum could work on a lag

that um something which fell very

sharply the allocations could be based

on that then some other part of the

market recovers faster so this may lag

so those kind of things can happen but

by and large this seem to have done very

well uh over a longer period of time and

fairly consistently all right sir and

who would you say this fund is best

suited

for uh so while this is a smart beat up

product uh it's a strategy product you

know it's based on momentum style but

the underlying is fairly Diversified so

we going to invest in the entire Market

500 so we're talking about large M small

cap wherever momentum is it's going to

pick up and there are going to be 50

stocks it's not you know very uh like

you know 10 Stock 15 stock it's 50 stock

and there is a capping applied to each

stock you know no single stock can be

more than 5% at the time of rebalancing

uh so you have Fair bit of

diversification from that as well uh

while it does not start with sector it

know it's bottom up you know from a

stock picking perspective but you will

have exposure to multiple sectors

currently it has exposure to 13 sectors

so from all that sense you know it's

highly Diversified and I explained to

you based based on you know the past

track record in terms of how it worked

in different market conditions it gives

an impression that this could be

considered as an all weather proposition

it can suit a whole lot of uh Equity

investors you know where they're looking

for a uh good strategy which can work

for them in the longer term generate

potentially higher returns and also has

the possibility of generating that uh

reasonably consistently I think you know

this is once a strategy so this may be

suitable for a good number of uh Equity

investors who seek you know aggressive

risk return

profile right SN what's your take how

should investors think about using this

fund as part of their broader investment

strategy right so uh like uh Arun

mentioned that you know such stocks will

do well in a runaway bull markets uh and

the back tested data shows that they

have done reasonably well in the bearish

phases as well but uh invest should look

to consider these strategies when

they've you know these kind of stocks

have seen bad times in real time basis

uh investors can treat such strategies

as part of their supplementary

allocation say about 5 to 10% of their

portfolio that really won't keep them up

at night so the you know fun allocation

as we uh say because U again mentioning

the fact that much of its historical

data is back calculated so given the

kind of untested nature over a Market

cycle conservative investors may choose

to avoid momentum funds but those open

to you know higher risks can embrace the

ride well that wraps up our discussion

thank you Arin and thank you SN for

sharing valuable insights it's been a

great conversation thanks thank you rir

[Music]