Momentum Investing– Investors adopt many strategies to create wealth, but factor-based investing is the most prominent among them. Just like a chef puts ingredients together to make a delicious dish, investors use different factors to select securities with high return potential. One such factor is momentum, i.e. taking advantage of the ongoing trend.
What is momentum investing?
Momentum investing is simple to understand. It is about ongoing trends. Meaning, stocks that have performed well are likely to continue to do so, and those that have performed poorly are likely to continue doing so in the short to medium term. This strategy leverages both market sentiment and behavioral finance, understanding that trends may continue because investors are often slow to react.
Price vs. Earnings Momentum
Momentum can be divided in two ways:
Price Momentum: This identifies stocks with price performance that is often correlated with market sentiment and technical indicators.
Earnings momentum: This focuses on companies experiencing earnings estimate improvements, which indicate solid fundamentals such as rising profit margins and improving efficiency. Earnings momentum is more sustainable than price momentum.
Benefits of Momentum Investing and How it Works
Trend riding: Momentum investing leads you to positive trends, which are often driven by institutional buying and analyst upgrades. Helps deal with biases: It helps overcome common investor mistakes, such as selling good stocks too early and holding on to bad stocks too long.
Adaptability: Momentum can change depending on market conditions – in favour of quality stocks during times of uncertainty or in favour of growth stocks during bullish periods.
Important Considerations
Momentum investing is powerful, but it also carries risk. Trends can change quickly, especially with price momentum. So diversification, rebalancing, a good understanding of market cycles are important. Momentum investing, when done thoughtfully and with thorough research, can add value to any portfolio.
Understanding Momentum Investing with Mutual Funds
It is not easy for most retail investors to adopt a momentum investing style as it requires technical and fundamental analysis. Professionally managed momentum-focused mutual funds can provide a simple solution for investors. ICICI Prudential Active Momentum Fund, an open-ended equity mutual fund scheme, selects stocks based on earnings and price momentum. The New Fund Offer (NFO) is available from July 8, 2025 to July 22, 2025.
Desclaimer: For any financial invest anywhere on your own responsibility, Times Bull will not be responsible for it.