Momentum Funds: Are They Worth Chasing Now?

Stop trying to buy cheap. Stop trying to predict the next big turn. In the last few years, a quiet but powerful idea has taken over a growing corner of India's Mutual Fund industry: simply buy the stocks that are already rising the fastest, and systematically sell the ones that are losing steam.[EasyDNNnews:PaidContentStart]

This is momentum investing. The principle is almost stubbornly simple. Yet in India, the underlying factor has delivered some of the strongest long-term returns among popular investment styles. Backtested data stretching back nearly two decades shows momentum indices often compounding well ahead of the broader market.

Momentum has moved from a market-jargon term to a retail mutual fund proposition. That shift matters because Indian mutual funds now sit inside a mass-market ecosystem: industry assets had reached ₹82.05 lakh crore across 27.81 crore folios by June 30, 2026, according to data by AMFI. A strategy once discussed mainly by quants and institutional investors is therefore being packaged for a much broader saver base.

The attraction is easy to understand. Momentum formalises one of the oldest observations in markets: securities that have been strong relative performers can continue to outperform for a period. But a cooling in recent returns has made this a good moment to ask a sharper question.

The right question is not: which momentum fund has given the highest recent return? It is: what kind of momentum exposure am I buying, how much factor risk am I taking, and does that exposure improve my overall portfolio risk return profile?

Momentum is a Rule, Not a Forecast
At its simplest, momentum investing buys stocks whose prices have displayed persistent strength. But India's better-known momentum indices do not merely rank stocks by raw returns. NSE's pure momentum methodology calculates six-month and 12-month price returns, divides them by one-year price volatility, converts those measures into standardised scores, and gives the two horizons equal weight. In effect, a stock with a smoother 45 per cent rise can outrank a stock that jumped 60 per cent with much greater volatility.

This matters because the strategy is looking for the quality of the price trend, not just its magnitude. For the Nifty500 Momentum 50, for example, the final stock weight is based on free-float market capitalisation multiplied by the normalised momentum score, with stock-level caps. The index is rebalanced semi-annually, in June and December, and buffer rules let some existing constituents stay even if their rank slips, reducing unnecessary churn.

The BSE MidCap 150 Momentum 30 Index consists of only 30 stocks, selected from the 150 companies in the BSE 150 MidCap Index. Stocks are ranked using their 12 month price performance after adjusting for volatility. The top 21 ranked stocks are included directly, while existing index stocks ranked between 22 and 39 are given preference to fill the remaining nine places. This keeps the index limited to 30 companies while reducing unnecessary changes in its composition. The index is reviewed every quarter, and each stock's weight is capped at 5 per cent at the time of rebalancing.

This table is not a technical footnote, it is the investment decision. A 30-stock large-and-Mid-Cap momentum portfolio, a 30-stock mid-cap momentum portfolio, and a 100-stock Small-Cap momentum-quality portfolio can all carry ‘momentum’ in the name while exposing the investor to very different risks.

Pure Momentum vs. Momentum Quality: Different Bets
The next distinction is between pure price momentum and momentum plus quality. NSE's momentum-quality indices combine the familiar six- and 12-month volatility-adjusted momentum signals with fundamental quality variables. For the Nifty500 Multicap Momentum Quality 50, quality is assessed using return on equity, debt-to-equity, and variability in EPS growth over the previous five years; the stock weight reflects the combined momentum-quality score and free-float market capitalisation.

That changes the character of the portfolio. Pure momentum asks: which eligible stocks have the strongest risk-adjusted trends? Momentum-quality asks: which stocks have strong trends and pass a financial-quality test? The second approach can reject or down-rank a spectacularly rising but financially weak company, a filter with intuitive value in smaller companies, where liquidity, leverage and quality dispersion tend to be greater. But it also means the investor is no longer buying a pure momentum factor.

The Hidden Sector Bets
Index Construction also determines hidden market-cap and sector bets that do not show up in the fund's name. As of the July 2026 factsheets:

This is an underappreciated risk of factor investing: rules can create sector concentration without a sector fund in the name. If industrial and capital goods shares currently show the strongest combination of price momentum and quality, the strategy will accumulate them. The portfolio remains mechanically diversified by stock count, yet its economic drivers may become concentrated.

A hybrid variant also exists in the market, a structure combining Nifty200 Momentum 30 exposure with government securities. That should not be compared one-for-one with a pure equity momentum scheme: the debt component changes the asset-allocation risk itself, not just the momentum methodology.

What the Money Actually Did: The Active Fund Scorecard
Labels aside, how did real, investable momentum funds actually perform? We compared NAV of eight active momentum schemes against the BSE 500 benchmark over the common period available across all of them: August 28, 2025 to August 6, 2026, roughly one year that included a sharp correction and a sharp recovery.

The dispersion is striking. Motilal Oswal Active Momentum gained about 27.3 per cent, while Axis Momentum gained about 4.3 per cent, against a BSE 500 return of roughly 5.0 per cent over the identical window. Union and Nippon India Active Momentum returned around 17 per cent, while Kotak, Quant and ICICI Prudential Active Momentum clustered near 13–14 per cent.

That spread is too large to dismiss as a rounding difference. But it should not be read as a league table for future returns. The common period is less than a year, the schemes have different inception histories, and active momentum funds are not identical to the passive index engines described earlier. The proper inference is narrower and more useful: the word ‘momentum’ does not define one portfolio. Process, universe, discretion, turnover and implementation all matter.

Risk and Reward Do Not Always Rhyme
A high return earned with a deep drawdown and a high return earned smoothly are not the same investment experience. Plotting each fund's one-year CAGR against its maximum drawdown, with the bubble size showing the Sharpe ratio, makes that visible in one chart.

Return Alone Can Mislead Momentum funds can deliver strong returns, but the journey matters just as much as the destination. Over the common 11-month period, fund returns ranged from 27.3% to 4.3%, while maximum drawdowns stretched from about 11% to nearly 17%. A fund that earns more while taking much deeper losses may not suit every investor. Looking at Sharpe ratio, drawdown and consistency alongside returns gives a clearer picture of how efficiently a fund has rewarded the risk taken across changing market conditions.

Motilal Oswal Active Momentum stands apart, the highest return and the deepest drawdown (-16.58 per cent), rewarded with the best risk-adjusted ratios (Sharpe 1.24, Calmar 1.77) because the return comfortably outran the pain. At the other end, Axis Momentum combined the weakest return with one of the deepest drawdowns and a negative Sharpe ratio, investors bore momentum-like risk without the momentumlike reward. ICICI Prudential Active Momentum is worth noting for the opposite reason: the shallowest drawdown (-11.01 per cent) in the group, suggesting a comparatively more risk-controlled implementation, even though its absolute return was middling.

How the Funds Behaved When the Market Turned
A return number hides the behaviour that produced it. We split the 11-month common period into seven ‘up’ months and four ‘down’ months for the BSE 500, and measured how each fund behaved in each regime.

Three funds, ICICI Prudential, Union, and Nippon India Active Momentum, beat the benchmark in every one of the four down months in this sample, even though their absolute returns varied widely. That is a meaningfully different skill from simply riding the biggest winners higher, and it is easy to miss if an investor looks only at the headline one-year return. Conversely, Motilal Oswal's chart-topping return came with a below-average down-market hit rate (50 per cent), its edge showed up disproportionately in the rally, not in cushioning the falls.

The Long-Term Case Is Strong, But the Path Can Be Brutal
Momentum deserves investor attention because its long-run evidence is not trivial. NSE's 2026 momentum white paper, using total-return index data back to April 2005, shows the following annualised since-inception returns:

Across the last 20 calendar years in that study, Nifty200 Momentum 30 beat Nifty 200 in 15 years, Nifty Midcap150 Momentum 50 beat its parent in 14, and Nifty500 Momentum 50 beat Nifty 500 in 13. That is meaningful persistence, but it also means underperformance occurred in several years. Momentum is a return premium with dry spells, not a permanently superior version of the market.

Momentum Rewards Patience, Not Certainty Long-term data makes a strong case for momentum, but not for uninterrupted outperformance. Over 20 years, major momentum indices beat their parent benchmarks in 13 to 15 calendar years, meaning several periods of lagging returns still occurred. Drawdowns were also severe, reaching roughly 68–73% in historical back-tests. The lesson is simple: momentum can reward discipline over long periods, but investors must be prepared for sharp reversals and extended dry spells.

A Caveat For Retail Investors Much of the ‘since 2005’ history above is back-tested index history, not live investable experience. Nifty200 Momentum 30 was launched only in August 2020, and Nifty Midcap150 Momentum 50 in August 2022, both using the same historical base date of April 2005. Back-tests are useful for studying how a rule would have behaved; they are not the same as investors actually earning those returns through a live fund. Transaction costs, expenses, tracking differences and real investor behaviour enter only once a strategy becomes investable. Give more weight to live performance where it exists, and treat back-tests mainly as a guide to how a methodology behaves across market regimes.

More important is what happens when the trend breaks. NSE's historical analysis found maximum drawdowns of about 68 per cent for Nifty200 Momentum 30 and 70 per cent for Nifty500 Momentum 50, deeper than the roughly 64 per cent suffered by their parent indices. Nifty Midcap150 Momentum 50 and its parent both suffered drawdowns of roughly 73 per cent in the long history. NSE itself describes the pattern plainly: momentum thrives in trending markets but faces challenges during reversals.

This demolishes a common misconception: volatility-adjusted momentum is not a low-risk strategy. Adjusting the momentum signal for volatility improves how stocks are ranked; it does not transform the resulting equity portfolio into a defensive fund. It can still own cyclical stocks, mid-caps and highly directional sectors, and its ‘winner’ basket can be hit hard when leadership reverses.

Is Momentum the Right Choice Now?
The latest evidence argues for neither enthusiasm nor rejection. It argues for discipline.

As of July 31, 2026, pure momentum had cooled materially.

Nifty200 Momentum 30's one-year return trailed its parent; Nifty Midcap150 Momentum 50 lagged its parent sharply over one year (3.27 per cent vs 9.01 per cent), although its five-year CAGR remained marginally superior. The official factsheets tell a more nuanced story than the idea that ‘momentum is currently the best-performing factor’, recent relative performance has weakened even as the longer historical record stays favourable.

This is not a timing signal. There is no basis for assuming that because the factor has lagged for one year, it is automatically ‘due’ to outperform next. Momentum can remain weak, rotate internally, or revive quickly. The case for buying it should come from strategic portfolio design, not a prediction about the next six months.

Valuation Gives No Simple Green or Red Light

Nifty200 Momentum 30 traded richer than its parent, but Nifty Midcap150 Momentum 50 was actually cheaper than the Midcap 150. Meanwhile, the momentum-quality portfolios carried richer multiples still. That variation reinforces a basic principle: valuation is an output, not an input, of pure momentum. An investor who wants an explicit valuation discipline should not assume a momentum fund provides it, a value factor, a broad-market core, or a multi-factor strategy may play that role more directly.

For a retail investor, the answer to ‘Is it a good time for momentum investing right now?’ is: yes, potentially, as a long-term satellite allocation for someone who understands factor cycles. No, if the reason for buying is simply that momentum funds have been recent return leaders.

SIP or Lump Sum: Solve the Behaviour Problem, Not the Factor Cycle
A SIP is often the cleaner route for a first-time momentum investor, but not because monthly investing magically removes momentum risk. It does not. If the factor underperforms for three years, a SIP investor still owns a factor that underperformed for three years.

What SIP does is spread purchase prices through time, reduce the emotional importance of a single entry date, and make it easier to maintain a planned allocation from monthly savings.

That is especially valuable in momentum because the strategy is inherently cyclical and can undergo abrupt changes in leadership. A lump-sum investor who enters after a strong run may suffer immediate regret if the trend reverses; a SIP reduces that single-date regret, though it can also underperform an immediate lump sum when markets rise steadily, because part of the capital stays uninvested for longer.

For an investor with regular monthly income and no existing momentum allocation, a SIP is a sensible default. For someone who already has a large investible corpus and has decided on a strategic momentum allocation, spreading the entry over several instalments may make behavioural sense, but keeping money permanently out of the market in anticipation of the ‘perfect’ momentum entry point is simply another form of market timing.

How to Select a Momentum Fund Without Buying the Rear-View Mirror
The selection process should begin with the parent universe, not the AMC logo. A Nifty200 Momentum 30 product is principally a large-and-mid-cap momentum exposure. Nifty Midcap150 Momentum 50 is a mid-cap factor bet. Nifty500 Momentum 50 has a much wider opportunity set. Mid-small and small-cap momentum-quality indices add a substantial size factor on top of momentum. An investor who already owns mid- and small-cap active funds may be doubling the same economic risk by adding a mid-cap or small-cap momentum product.

1. Choose the universe — An investor seeking a relatively straightforward satellite around a diversified core may find a Nifty200 or Nifty500 momentum strategy easier to accommodate than a pure mid-cap or small-cap factor fund. Pick a mid-cap momentum fund because you deliberately want mid-cap plus momentum, not merely because its historical CAGR is higher.

2. Choose pure momentum vs momentum-quality — Pure momentum gives the factor its clearest expression. Momentum-quality adds a fundamental filter attractive to investors uncomfortable owning a stock solely for its price behaviour, but the filter can dilute pure momentum and create different sector or valuation exposures. Neither is universally superior; they are genuinely different rule sets.

3. Check concentration — Stock count alone is inadequate. Look at the top 10 holdings, top three sectors, and the difference from the parent index. A 50-stock fund with 60 per cent exposure to two economic themes can be less diversified in practice than its stock count suggests.

4. Check overlap with what you already own — Owning a Nifty200 Momentum 30 fund, a Nifty500 Momentum 50 fund and an active momentum scheme may look diversified because there are three folios, yet their high-ranked winners can overlap, and the same stocks can also appear in your mid-cap or capital-goods-heavy active funds. Diversification is about underlying exposures, not the number of scheme names.

5. Examine the rebalance architecture — Six and 12- month signals versus a mainly 12-month signal, semiannual versus quarterly review, and 30 vs 50 vs 100 holdings can materially change behaviour. That is why even two passive momentum funds can produce different return paths despite both being ‘rules based’.

6. Evaluate implementation — For passive products, methodology determines what the fund should earn; implementation determines how much of that experience reaches the investor. SEBI's mutual fund framework requires passive schemes to disclose tracking error and tracking difference, use them. Compare actual tracking difference over a meaningful period, fund size and portfolio replication; for ETFs, also check liquidity and the bid-ask spread. A marginally lower expense ratio is not automatically preferable if you transact at poor market prices or the scheme shows persistently weaker replication.

7. For active funds, interrogate the process — Understand how the fund manager defines momentum, whether fundamentals can override price signals, how quickly deteriorating trends are exited, whether market-cap or sector limits apply, the resulting portfolio turnover, and whether the live record includes a genuine market reversal. The wide dispersion in Table 3 makes this distinction important.

8. Do not use one-year return as the final screen — Table 3 is an excellent demonstration of why. A scheme that happens to own the market's current winners can top the table by a huge margin over 10–12 months. That tells you what worked in that period. It does not tell you whether the methodology suits your portfolio over the next decade.

HOW MUCH SHOULD YOU ALLOCATE? For most retail portfolios, momentum is better treated as a satellite, not the core. A reasonable rule of thumb: around 5–10 per cent of the equity portfolio for an investor beginning factor exposure, and up to roughly 10–15 per cent for a higher-risk investor who already has a diversified core and can tolerate extended periods of relative underperformance. This is an editorial rule of thumb, not a SEBI prescription, and not a guarantee of an optimal allocation.

Choose the factor engine first, the market-cap universe second, portfolio construction and implementation third, and recent returns last.

The Bottom Line
Momentum is neither a fad to avoid nor a shortcut to superior returns. It is a well-documented but cyclical source of equity risk and return. The historical Indian index evidence gives it a credible place in a diversified portfolio, while the latest 2026 data are a timely reminder that the factor can lag even when its long-run record looks compelling.

For the retail investor, that leads to one clear verdict: buy momentum only if you are prepared to own it when it stops looking like the best-performing fund on the screen. That is when the strategy stops being a return-chasing idea and becomes an actual investment discipline.

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