Nippon India Nifty 500 Momentum 50 Index Fund: A Worthy Bet to Indulge in Momentum Investing?

Against the backdrop of the positive momentum in the Indian equity market and conditions in favour of the growth style of investing, quite a few fund houses of late have come up with momentum funds.

The reason for Indian equities doing is well, is because the Indian economy has exhibited an alluring growth rate -- it is one of the fastest-growing major economies in the world (driven by consumption and public investment in infrastructure). India is a “bright spot” as observed by the IMF, as several reforms carried out over the last two decades. This encouraging growth is also reflected in the corporate earnings of companies across the market cap spectrum -- largecaps, midcaps, and smallcaps. And heartened by the earnings data, several Indian indices have surged to new highs in the last couple of years, more so after the COVID-19 pandemic. Given the upbeat market sentiments, no one seems to want to miss the bus and fund houses are capitalising on this opportunity in their race to garner more Assets Under Management (AUM).

Nippon India Mutual Fund has now launched the Nippon India Nifty 500 Momentum 50 Index Fund. This Scheme aims to benefit from the momentum of the top 50 performing stocks in the Nifty 500 Momentum Index. The goal of momentum investing is to capitalise on the tendency of stocks that have been performing well to continue performing well in the future.

During the NFO period, the Scheme is open for subscription from September 11, 2024, to September 25, 2024. Thereafter the scheme re-opens for subscription on October 8, 2024.

Nippon India Nifty 500 Momentum 50 Index Fund is an open-ended scheme replicating/tracking the Nifty 500 Momentum 50 Index. Simply put, the returns of the Scheme would correspond to the returns of the Nifty 500 Momentum 50 Total Return Index, subject to tracking error.

Up to 95% to 100% of the Scheme’s total assets will be invested in securities constituting the Nifty 500 Momentum 50 Index.

The Scheme may also invest up to 20% of the total assets of the equity portfolio in equity Derivative instruments. This exposure to equity derivatives of the index itself or its constituent stocks may be undertaken when equity shares are unavailable, insufficient or for rebalancing in case of corporate actions for a temporary period. The Scheme will use various derivative and hedging products to reduce the risk of the portfolio (in the manner permitted by SEBI from time to time) and such exposure to derivatives will be rebalanced within 7 days.

The Scheme would also invest up to 5% of its total assets in cash & cash equivalents and money market instruments and/or Schemes which invest in the money market securities or liquid schemes. This shall be to meet the liquidity requirements of the Scheme.

Cash Equivalents include Government Securities (G-secs), Treasury bills (T-bills) and Repo on G-secs having residual maturity of less than 91 days.

The scheme may engage in securities sending not exceeding 15% of the net assets of the scheme and shall not lend more than 5% of its net assets to a single counterparty (here counterparty means an intermediary/broker through whom we deal in securities) or such other limits as may be permitted by SEBI from time to time after seeking necessary approval, whenever required.

The Scheme will not invest in securitized debt, ADR, GDR, foreign Securities, REITs and InvITs, Fund of Fund (FoF) Scheme, Credit Default Swaps (CDS), debt Instruments with special features (viz., AT1 and AT2 Bonds), debt Instruments with Structured Obligation (SO) or Credit Enhancement (CE), nor will it engage in short-selling and repo in corporate debt.

The cumulative gross exposure through equity shares, money market instruments and derivatives position shall not exceed 100% of the net assets of the Scheme.

The fund manager would monitor the tracking error of the Scheme on an ongoing basis and would seek to minimize the tracking error. Under normal circumstances, Nippon Life India Asset Management Ltd. (NAM India AMC) shall endeavour that the tracking error of the Scheme shall not exceed 2% per annum. But there can be no assurance or guarantee that the Scheme will achieve any level of Tracking Error relative to the performance of the underlying Index.

What Is the Investment Objective?

The investment objective of the scheme is to provide investment returns that commensurate to the total returns of the securities as represented by the Nifty 500 Momentum 50 Index before expenses, subject to tracking errors.

However, there is no assurance that the investment objective of the Scheme will be achieved.

What Is the Investment Strategy?

The Nippon India Nifty 500 Momentum 50 Index Fund will follow a passive investment approach designed to track the performance of the Nifty 500 Momentum 50 Total Return Index (TRI).

The Scheme seeks to achieve this goal by investing in securities constituting the Nifty 500 Momentum 50 Index in the same proportion as in the Index.

The AMC does not make any judgments about the investment merit of the Nifty 500 Momentum 50 Index, nor will it attempt to apply any economic, financial or market analysis. This would be done by investing in all the stocks comprising the Nifty 500 Momentum 50 Index in approximately the same weightage that they represent in the Nifty 500 Momentum 50 Index. The Scheme will invest at least 95% of its total assets in the securities comprising the underlying index.

A small portion (up to 5%) of the total assets may also be invested in money market instruments to meet liquidity and expense requirements.

The Scheme will benchmark its performance against the Nifty 500 Momentum 50 TRI.

About the Nifty 500 Momentum 50 Index

The Nifty 500 Momentum 50 Index tracks the performance of 50 stocks which are selected based on normalized momentum score from the Nifty 500 index.

The momentum score for each company is determined based on its 6-month and 12-month price return, adjusted for volatility.

The weight of each stock in the index is based on the combination of the stock’s momentum score and its free float market capitalization.

Stocks part of the Nifty 500 index at the time of review are eligible for inclusion in the index. Moreover, stocks that scored low on liquidity parameters are excluded from the index.

The index has a base date of April 1, 2005, with a base value of 1,000. The index is reconstituted semi-annually (June and December).

At present, the top constituents of this index are as under:

Table: Top Constituents of the Nifty 500 Momentum 50 Index

(Source: NSE Indexogram Factsheet as of August 2024)

The Nifty 500 Momentum 50 Index has representation to sectors such as capital goods, financial services, auto & auto components, power, consumer services, consumer durables, construction, metals & mining, oil & gas, and realty among others.  

Since its inception on June 4, 2024 (with the base date as April 1, 2005), the Nifty 500 Momentum 50 Index has delivered a compounded annualised price return of 23.8% and a total return (which includes dividends) of 24.9% (as of August 30, 2024).

Over the last one year, the Nifty 500 Momentum 50 Index has clocked a stellar absolute total return of 69.5% as of August 30, 2024, rewarding investors very well.

Graph 1: Long-term Performance of Nifty 500 Momentum 50 Index

Data as of August 30, 2024
TRI – Total Return Index | TRI values are rebased to Rs 10,000 at the inception date of the Nifty 500 Momentum 50 Index on April 1, 2005.
Past performance may or may not be sustained in future and the same may not necessarily provide the basis for comparison with other investments.
(Source: MFI, NSE as given in the fund house’s investor presentation)

Particularly after the lows of the COVID-19 momentum investing, has delivered attention-seeking returns. Moreover, as seen in the graph above, the Nifty 500 Momentum TRI has generated a significant alpha compared to the Nifty 500 TRI.

Graph 2: Rolling Return Performance of the Nifty 500 Momentum TRI v/s Nifty 500 TRI

Data as of August 30, 2024
Period of rolling returns: April 1, 2005, to August 30, 2024
Rolling returns are compounded annualized and calculated on a daily frequency basis.
(Source: MFI as given in the fund house’s investor presentation)

Moreover, when seen on a rolling returns basis across time periods (in Graph 2), the Nifty 500 Momentum TRI has generated a noticeable alpha compared to the Nifty 500 TRI for the risk taken.

Since April 1, 2005, until now, the Nifty 500 Momentum 50 TRI has given positive returns in 14 out of 19 calendar years. Around 32% average calendar year returns over the 19-year timeline.

Here’s what Sundeep Sikka, ED and CEO, of Nippon India Mutual Fund said at the launch of Nippon India Nifty 500 Momentum 50 Index Fund:

“We are thrilled to introduce the Nippon India Nifty 500 Momentum 50 Index Fund. This Fund offers investors a diversified exposure to India's growth story while focusing on companies exhibiting strong upward momentum. Building on our distinguished track record in passive investments, we remain committed to deliver innovative and robust solutions that align with our customers' evolving financial goals.”

Keep in mind, the fundamental principle behind momentum investing is that stocks or other financial assets that have performed well in the past will continue to perform well in the future, while those that have performed poorly will continue to perform poorly.

Momentum investing relies on the hypothesis that financial instruments which have shown an upward or downward price trend will continue to do so for a certain period. This strategy is grounded in behavioural finance, which suggests that investors' psychological biases and market sentiment can drive prices in the short term.

Having said that, the operational performance of a company is also a factor in momentum investing. Technical indicators are used in momentum investing to analyse a security and detect patterns, as well as to measure the intensity of the trend and the degree of price momentum in the market.

Thus, momentum investing tries to ride this wave or momentum of stocks that are doing well and then jump on to the next wave before the first one slows down.

[Read: All You Need to Know About Momentum Mutual Funds]

Who Will Manage Nippon India Nifty 500 Momentum 50 Index Fund?

Mr Himanshu Mange, who has over 5 years of experience will be managing the Scheme. He has been with Nippon India Mutual Fund since February 2022. Before that, he was with TATA AIA Life Insurance Co. Ltd. as an Assistant Manager (Investment Operations – Finance & Accounts).

Himansh is a Chartered Accountant by qualification. At Nippon Indian Mutual Fund, he manages various other index funds and Exchange Traded Funds (ETFs).

How much is the Minimum Investment in Nippon India Nifty 500 Momentum 50 Index Fund?

During the NFO period and ongoing/continuous basis, the minimum investment in the Scheme is Rs 1,000/- and in multiples of Re. 1/- thereafter.

Investors can also avail of the Systematic Investment Plan (SIP) mode to make investments. In case the investor has not specified the frequency then by default the frequency will be treated as monthly.

Both, the Direct Plan and Regular Plan for available for investments plus the options available are Growth and Income Distribution cum Capital Withdrawal (IDCW).

Who Should Consider Investing in Nippon India Nifty 500 Momentum 50 Index Fund?

This fund is suitable for investors who are looking for a diversified equity portfolio with a focus on momentum-driven stocks across the market capitalisation spectrum.

The returns would correspond with the performance of the Nifty 500 Momentum 50 Index, subject to a tracking error.

Historically it has been observed that the momentum strategy may work well in the bull and recovery phase of the market and may underperform in the bear phase.

Currently, the Price-to-Equity (P/E) and Price-to-Book Value (P/BV) ratio of the Nifty 500 Momentum 50 Index Fund is at around 31x and 6x, respectively -- which cannot be considered cheap. The valuations of midcap and smallcaps, at present, particularly look stretched (much higher than the historical averages) and, therefore, are a concern.

Going forward, if earnings do not meet market expectations or fall, it could hinder the positive momentum and weigh on the performance of the indices.

One ought to have a very high-risk appetite and a longer investment horizon of at least 5 to 7 years to invest in the Nippon India Nifty 500 Momentum 50 Index Fund.

To know more about the Nippon India Nifty 500 Momentum 50 Index Fund, read the Scheme Information Document and Key Information Memorandum.

Make an informed investment decision and be a thoughtful investor.

Happy Investing!