Alpha vs momentum funds: Where should you invest?

Summary

This video compares factor funds based on momentum and Alpha investing strategies, aiming to guide investors on which to choose. It details the investment strategies of 11 indices, highlighting the differences between Alpha and momentum-based indices, such as weight assignment and rebalancing frequency. The analysis includes performance data, showing that pure Alpha and momentum indices have outperformed multifactor ones. The top-performing indices are identified, with a focus on risk-adjusted returns and downside protection, offering insights for investors seeking to enhance their portfolio returns.

Takeaways

• 📈 Investors are drawn to momentum funds for their high returns, but Alpha strategy funds have shown even better performance.
• 🔍 The video will compare Factor funds based on momentum and Alpha strategies, aiming to guide viewers on which to choose.
• 🏦 The script discusses 11 indices related to index funds, with a focus on Nifty 200 momentum 30 and Nifty 200 Alpha 30 ETFs.
• 📊 Alpha indices are a variation of the momentum strategy, both primarily depending on the price movement of stocks.
• 📉 Momentum indices assign weights to stocks based on their momentum scores and free float market cap, favoring larger companies.
• 📈 Alpha indices use an alpha score to shortlist stocks and assign weights, not considering free float market cap, except for Nifty 100 Alpha 30.
• 📊 A comparison of portfolios shows that Alpha-based indices have a higher midcap allocation compared to momentum-based indices.
• 🔄 The rebalancing frequency of indices affects performance, with Alpha indices rebalancing more frequently than momentum indices.
• 📊 Backtested data shows that all 11 Alpha and momentum indices have outperformed Nifty 500, with the top three having over 25% returns.
• 📉 Multifactor indices have underperformed compared to pure momentum or Alpha indices in terms of returns and volatility.
• 📉 The top-performing indices in terms of risk-adjusted returns were identified, with Nifty Alpha 50 and Nifty 200 Alpha 30 showing strong performance.
• 💡 The video concludes by suggesting that the analyzed indices can be good options for investors looking to boost their portfolio returns.

Q & A

What is the main topic of the video?

The main topic of the video is a comparison between Factor funds based on momentum and Alpha investing strategies.

Why are momentum funds popular among investors?

Momentum funds are popular among investors because they have historically shown high returns.

What is the difference between Alpha and momentum strategies in the context of the video?

Alpha strategies involve selecting stocks based on a score that indicates potential outperformance, while momentum strategies focus on stocks with strong recent price movements.

Which index is mentioned as one of the most popular in the video?

The Nifty 200 Momentum 30 index is mentioned as one of the most popular indices in the video.

What is the significance of free float market cap in momentum indices?

The free float market cap is significant in momentum indices because it determines the allocation to each stock, with larger companies typically having a higher allocation due to their bigger free float market cap.

How does the rebalancing frequency of an index impact its performance?

The rebalancing frequency can impact performance by allowing indices to adjust their holdings more or less frequently, which can affect how quickly they can exit underperforming stocks.

What is the difference in midcap allocation between Nifty 200 Alpha 30 and Nifty 200 Momentum 30 as of June 2024?

As of June 2024, the Nifty 200 Alpha 30 had a midcap allocation of 5.38%, while the Nifty 200 Momentum 30 had only 0.74%.

What does the video suggest about the performance of multifactor indices compared to pure Alpha or momentum indices?

The video suggests that multifactor indices have underperformed compared to pure Alpha or momentum indices based on the analyzed data.

What are the two metrics used in the video to measure volatility?

The two metrics used to measure volatility in the video are standard deviation and downside protection.

Which index had the best downside protection among the eight analyzed indices?

Among the eight analyzed indices, the Nifty 200 Alpha 30 had the best downside protection.

What is the recommendation for investors looking to boost returns in their portfolio based on the video?

The recommendation for investors looking to boost returns in their portfolio is to explore index funds that have generated good returns and shown decent volatility protection, such as the top five indices mentioned in the video.

Outlines

00:00

📈 Introduction to Factor Funds and Momentum vs. Alpha Strategies

This introductory paragraph sets the stage for a discussion on Factor funds, specifically comparing the momentum and Alpha investing strategies. The script explains why investors are drawn to momentum funds due to their high returns, but also highlights that Alpha-based funds have outperformed them. The video is structured into two main sections: an exploration of the investment strategies of 11 indices, including similarities and differences between Alpha and momentum indices, and a performance comparison of these indices. The goal is to guide viewers in making an informed decision on which factor fund to choose, emphasizing the importance of watching the entire video for a comprehensive understanding.

05:03

🔍 Analyzing the Differences Between Momentum and Alpha Indices

The second paragraph delves into the specifics of momentum and Alpha investing strategies. It clarifies that there is no significant difference between the two indices, with Alpha indices being a variation of the momentum strategy. The paragraph explains that momentum investing focuses on the price movement of stocks, while Alpha indices add an Alpha score to refine stock selection. The construction of momentum indices is described, where stocks are assigned a momentum score and then weighted by their free float market cap, leading to a bias towards larger companies. In contrast, Alpha indices use the Alpha score to assign weights without considering the free float market cap. The paragraph also discusses the impact of these criteria on portfolio composition, using the Nifty 200 Alpha 30 and Nifty 200 momentum 30 as examples to illustrate the difference in midcap allocation between the two strategies.

10:04

📊 Performance Comparison and Investment Implications

The final paragraph wraps up the video by examining the performance of the various indices and discussing the implications for investment strategies. It notes that while the indices have been launched recently, back-tested data is used for analysis due to the lack of a long performance history. The 7-year trailing returns show that all 11 Alpha and momentum indices have outperformed the Nifty 500, with the top indices generating over 25% returns. The paragraph also addresses the rebalancing frequency of the indices, which can affect performance, using the example of a stock that lost momentum after being added to the portfolios. The risks and returns of the strategy indices are evaluated, considering both standard deviation and downside protection as volatility metrics. The Nifty 200 Alpha 30 index is highlighted for its downside protection, and the paragraph concludes by suggesting five indices that have shown good returns and volatility protection as potential investment options for viewers, while also mentioning the available investment funds for these indices.

Keywords

💡Momentum Funds

Momentum funds are investment vehicles that focus on stocks with a high rate of price increase over a specific period. They are popular among investors due to their potential for high returns. In the video, momentum funds are compared with Alpha strategy funds, with the script highlighting that although momentum funds are favored, Alpha strategy funds have outperformed them, making the comparison relevant to the theme of investment strategies.

💡Alpha Strategy

Alpha strategy in investing refers to the methodology of selecting stocks that are expected to outperform the market beyond what would be predicted by beta, which measures a stock's volatility in relation to the market. The script explains that Alpha indices are a variation of the momentum strategy, assigning an Alpha score to stocks to determine their weight in the portfolio, which is a key concept in the video's discussion of investment styles.

💡Factor Funds

Factor funds are a type of investment fund that focuses on specific characteristics or 'factors' of stocks, such as value, size, or momentum. The video discusses whether to choose a factor fund based on Alpha or momentum strategy, which is central to understanding the different investment approaches presented.

💡Index Funds

Index funds are a type of mutual fund or exchange-traded fund (ETF) with a portfolio constructed to match or track the components of a financial market index. The script mentions that investors need to pick an index fund that tracks one of the 11 indices discussed in the video, which is a fundamental aspect of the investment strategy being explored.

💡Nifty 200 Momentum 30

Nifty 200 Momentum 30 is a specific index mentioned in the script that is tracked by several index funds. It represents a subset of stocks from the Nifty 200 index, selected based on their momentum. The script uses this index as an example to illustrate the performance and characteristics of momentum-based indices.

💡Free Float Market Cap

Free float market cap refers to the value of the portion of a company's shares that are available for trading by the public, excluding shares held by insiders or large investors. In the context of the video, it is used to determine the allocation of stocks in momentum indices, with larger companies typically having a bigger allocation due to their larger free float market cap.

💡Rebalancing Frequency

Rebalancing frequency is the rate at which an index adjusts its composition to maintain its intended characteristics. The script explains that momentum-based indices rebalance every six months, while Alpha-based indices may rebalance quarterly or semi-annually, which can impact the performance of the indices.

💡Risk-Adjusted Returns

Risk-adjusted returns are a measure of an investment's excess return per unit of risk. The script uses this concept to evaluate the performance of different indices by comparing their average holding returns with their standard deviation, which helps to determine which indices provide the best balance of return and risk.

💡Downside Protection

Downside protection refers to an investment's ability to limit losses during market downturns. The video discusses this concept by comparing how different indices performed in quarters when the Nifty 500 had negative returns, highlighting the importance of downside protection in investment strategy.

💡ETF (Exchange-Traded Fund)

An ETF is a type of investment fund that is traded on stock exchanges, much like individual stocks. The script mentions ETFs as one of the investment options for indices like the Nifty 200 Alpha 30, providing viewers with specific examples of how they can invest in the discussed indices.

💡Mutual Fund

A mutual fund is a type of investment vehicle consisting of a portfolio of stocks, bonds, or other securities, managed by a professional money manager. The script concludes with a reminder about the risks associated with mutual fund investments, emphasizing the importance of reading all scheme-related documents carefully before investing.

Highlights

Investors prefer momentum funds for their high returns, but Alpha strategy funds have shown even better performance.

The video compares Factor funds based on momentum and Alpha investing styles, providing insights into which to choose.

There are 11 indices discussed for investment in either momentum or Alpha through index funds.

Miray Asset launched Nifty 200 Alpha 30 ETF and a fund of fund for the ETF, indicating growing interest in Alpha indices.

Alpha indices are a variation of the momentum strategy, both primarily depending on the price movement of stocks.

Momentum indices assign weights to stocks based on their momentum scores and free float market cap.

Alpha indices use an alpha score to shortlist stocks and then assign weights, excluding free float market cap as a criterion.

Nifty 200 Alpha 30 and Nifty 200 Momentum 30 indices were compared for their investment strategy and stock selection.

Momentum-based indices tend to favor larger companies due to their higher free float market cap.

Alpha-based indices can potentially outperform momentum indices as they are not biased towards large caps.

Rebalancing frequency differs between momentum and Alpha indices, impacting their performance.

Backtested data was used to analyze performance due to the recent launch of most indices.

All 11 Alpha and momentum indices outperformed the Nifty 500, with the top three showing over 25% returns.

Multifactor indices have not performed as well as pure momentum or pure Alpha indices based on returns data.

Risk is measured using standard deviation, with higher volatility leading to higher standard deviation.

Risk-adjusted returns combine returns and volatility, with the Nifty small cap 250 momentum quality 30 delivering the best.

Downside protection was measured by comparing index performance during quarters when Nifty 500 had negative returns.

Five indices showed good returns and decent volatility protection, making them attractive investment options.

Investment options for these indices are discussed, with Mirai offering the only fund for Nifty 200 Alpha 30.

Mutual fund investments are subject to market risks, and it's important to read all scheme-related documents carefully.

Transcripts

[Music]

investors love momentum funds and the

reason is simple These funds have high

returns however funds based on Alpha

strategy have done even better than

momentum so if you're looking at Factor

funds should you choose one based on

Alpha or momentum strategy that's what

we will discuss in this video hello and

welcome to ET money's YouTube Channel

today we will compare Factor funds based

on momentum and Alpha investing Styles

now this video is divided into two broad

sections first we will look at

investment strategy of these 11 indices

here we will look at similarities and

differences between Alpha and momentum

based indices then we will compare the

performance of all the 11 indices by the

end of this video you will know which

one should you pick so I recommend that

you stay till the end all right let's

[Music]

begin if you want to investing either

momentum or Alpha you need to pick an

index fund that tracks one of the 11

indices we will discuss in this video

now one of the most popular indices is

the Nifty 200 momentum 30 at present

around seven index funds are based on

this although only a few schemes are

based on Alpha indices fund houses are

launching schemes in the space for

example miray asset launched Nifty 200

Alpha 30 ETF around 8 months ago it has

now launched a fund of fund for the ETF

the nfo closes on 22nd July now before

discussing the performance we will be

discussing similarities and differences

in the investment strategy of momentum

and Alpha index however if you're only

interested in the performance you can

skip to the second section of the video

all right let's start with the first one

so there is no significant difference

between the Alpha and the momentum

indices in fact the alpha indices are

nothing but a variation of the momentum

strategy to understand why are we saying

this let's first talk about what is

momentum investing momentum is all about

the price mov so when choosing stocks

based on momentum you primar look at the

three six or onee returns price movement

is the key here but on top of it you can

add other elements for example you can

Define the stock Universe choose stocks

that are traded in future and options

and other such parameters now Alpha

indexes are also based on a similar

concept the index makers first look at

the recent price M of stocks now we said

Alpha is another variation of momentum

as both strategies primarily depend on

the price moment of stocks now you might

be wondering what is the difference

between these two then well let's talk

about that when constructing momentum

indices the makers first assign each

stock a momentum score and then use use

the free float market cap to decide the

allocation to each stock simply put a

free float is nothing but stock units

available for trading for instance let's

say company a has 75% promoter share

holding the remaining 25% holding is

with mutual funds and individual

investors the 25% with public is known

as the free float when you look at the

total value of these stocks it's called

the free float market cap now that's the

basic definition so when you look at the

criteria for the all five indices based

on momentum they consider the free float

market cap along with momentum scores to

assign weight naturally the larger the

company the bigger the free float market

cap what this means is that the momentum

indices will usually have a higher

allocation to bigger companies in its

Universe in the case of alpha indices

the makers assign an alpha score to

short list stocks and once the stocks

are shortlisted the same Alpha score of

short L stocks is used to assign weights

to the stocks so unlike momentum based

indices free float market cap is not a

criteria here however of the six indices

based on Alpha Factor there is one

exception in the case of nifty 100 Alpha

30 index the stock allocation or weight

is decided based on the free float

market cap next to understand how this

criteria affects portfolios of these

indices we looked at the portfolios of

nifty 200 Alpha 30 and Nifty 200

momentum 30 we took these two indices

because both select 30 stocks with

strong momentum from the top 200

companies so their investment strategy

and shortlisted companies are quite

similar however if we compare the midcap

allocation in these indices the alpab

based index had a midcap allocation of

5.38% as of June 2024 during the same

period the midcap allocation in the

Nifty 200 momentum 30 index was only

74% so as expected the momentum based

index is heavily skew towards larger

companies now knowing this difference is

essential as it impacts the performance

of these indices for example we know

larger companies fall less whenever the

market corrects so momentum based

indices may have better downside

protection than alpab based indices

similarly in theory alpab based indices

can outperform momentum based indices as

they are not biased towards large caps

they are more driven by a Stock's

performance now we will see if these

assumptions hold true later in the video

when we discuss performance all right

the next difference in the investment

style of both these factors is the

rebalancing frequency all the five

momentum based indices rebalance their

portfolios every 6 months in the case of

alpab based indices three are rebalanced

quarterly and the remaining three are

rebalanced every 6 months now this

difference in rebalancing frequency can

impact performance let's take the

example of alcam to understand this

alcam entered the Nifty 200 Alpha 30 and

Nifty 200 momentum 30 portfolios in

December

2023 however both indices soon exited it

the alpha index exited the stock after 3

months while the momentum index exited

after 6 months now the stock had gained

31% between October 2023 and November

2023 this strong momentum could be why

both indices invested in it in December

2023 but the stock lost momentum soon

after it was added it remained flat and

generated a return of Min

-14% between 1st January 2024 and 1st

March

2024 now due to this underperformance

the Nifty 200 Alpha 30 index exited the

stock during its next quarterly

rebalancing in March 2024 however the

momentum based index had to wait 6

months to exit the stock on its next

rebalance so while the Nifty 200 Alpha

30 sold the underperforming stock sooner

the Nifty 200 momentum 30 was able to do

it much later now this shows how

differences in rebalancing can lead to a

difference performance of this indices

let's now look at the risks and returns

of the strategy indices and how they

have

[Music]

performed most of these indices were

launched recently so we don't have a

long performance history so we had to

rely on the back tested data for this

analysis let's first look at the 7-year

trailing returns in the last 7 years all

11 Alpha and momentum indices have

outperformed Nifty 500 the top three

indices had over 25% returns these

include Nifty Alpha 50 nifty 500

momentum 50 and Nifty midcap 150

momentum 50 the next two indices in the

top five are Nifty 200 Alpha 30 and

Nifty 200 momentum 30 they also have

over 22% returns now in the previous

section we saw that both indices have

the same investment universe but here

the returns of the Nifty 200 Alpha 30

were marginally higher than the Nifty

200 momentum 30 there's another

interesting aspect here none of the top

five indices were multiactor they're

either pure momentum or pure Alpha now

based on the returns data the multiactor

approach has not done as well as pure

alpha or momentum let's now look at

rolling returns to see if this trend

prist for this we looked at the 7-year

average rolling returns between July

2014 and July 2024 the results were no

different first all indices have out

from the Nifty 500 Index second the top

five funds remain the same third the

multiactor indices have underperformed

pure momentum and Alpha indices after

returns we will look at the volatility

we will use two metrics to measure

volatility first the standard deviation

and then the downside protection now

standard deviation is a popular metric

to measure the risk or volatility of any

investment instrument a higher

volatility leads to a higher standard

deviation which implies more risk on the

contrary relatively stable instruments

have lower standard deviation which

implies less risk now we calculated the

standard deviation of the 7-year rolling

Returns the results were in line with

our expectations the pure momentum

indices that generated the best returns

had higher volatility multiactor indices

on the other hand showed the least

volatility as returns and volatility

show a contrasting picture it's

difficult to determine which are the

best indices overall so we combine the

returns and volatility this gives us

risk adjusted returns for this we

divided the average holding returns of

this indices with their standard

deviation the Nifty small cap 250

momentum quality 30 which is a

multiactor index has delivered the best

risk adjusted Returns the pure momentum

indices in the top five based on average

returns were in the middle and the

bottom three again were multiactor

indices these include Nifty Alpha low

volatility 30 Nifty Alpha quality low

volatility 30 and Nifty Alpha quality

value low volatility 30 now these three

indices also had the lowest average

rolling return so we dropped these three

indices from our further analysis and we

were left with eight

indices let's move to our second

volatility metric and look at the

downside protection of these indices for

this we look at the quarters where Nifty

500 generated a negative return now

since January 2013 there were 12 search

quarters next we compared the

performance of these indices with Nifty

500 we wanted to see in how many

quarters this indices fell less than the

Nifty 500 Index now out of the eight

indices Nifty 200 Alpha 30 had the best

downside protection it fell Less in

eight out of the 12 quarters the next

four fell lesser in seven out of the 12

quarters however if you look at the

bottom three indices they don't show

better downside protection so we

excluded Nifty midcap 400 momentum

quality 100 Nifty 500 momentum 50 and

Nifty small cap 250 momentum quality 100

and finally we were left with five

indices they are Nifty Alpha 50 nifty

200 Alpha 30 Nifty 200 momentum 30 Nifty

100 Alpha 30 and Nifty 150 momentum 30

index these five indices not only

generated good returns but also showed

decent volatility protection now if we

look at the realtime returns of these

five indices then in the last one year

they have generated very high returns

Nifty Alpha 50 generated 81.6 1% returns

similarly the returns of the other four

indices were between 68% and 80% in the

same period returns of nifty 500 was

only

39.4% so overall if you're looking for

index funds that can boost returns of

your portfolio these can be some good

options you can explore now if we look

at investment options for this indices

then for Nifty 200 Alpha 30 Mirai is the

only option as mentioned earlier the

fund house already has an ETF but

currently the fund house has also

launched nfo for a fund of fund that

will invest in the ETF next there are

funds from ID wice and Tata if you want

to invest in Nifty midc 150 momentum 50

for Nifty 200 momentum 30 you have seven

options to choose from in Nifty Alpha 50

you have an ETF from kotch and an index

from from bundan mutual fund and

unfortunately for Nifty 100 Alpha 30

there are no funds right now so if you

wish to invest in this index then you'll

have to wait until an AMC launches a

fund tracking this index and with this

we have come to the end of the video I

hope you found the analysis insightful

and if you did please don't forget to

share it with your friends and family

I'll see you soon with another video

till then take care mutual fund

Investments are subject to Market risks

read all scheme related documents

carefully