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UTI AMC launched the country's first momentum-based passively managed mutual fund in March 2021.
Now, Motilal Oswal AMC has thrown its hat into the ring. The fund-house has launched its momentum factor based ETF and index fund - Motilal Oswal Nifty200 Momentum 30 ETF and Motilal Oswal Nifty200 Momentum 30 Index Fund. These are open-ended schemes tracking the performance of Nifty200 Momentum 30 index. The new fund offer period closes February 4. Here is all you need to know about the offerings.
Decoding momentum
The momentum factor refers to the tendency of winning stocks to continue performing well in the near term. Globally, factor investing, and particularly momentum as a factor, has caught investor attention over the last decade.
The Motilal ETF and index funds will follow Nifty200 Momentum 30 index, which aims to track the performance of the top 30 companies within the Nifty 200 index selected based on their normalised momentum score. The normalised momentum score for each company is determined based on its 6-month and 12-month price return, adjusted for its daily price volatility. Because it takes into account return and volatility, the index not only picks stocks that have moved higher, but those that are also less volatile. Without volatility, the index would merely pick stocks moving in fits and starts. Though the index has a base date of April 1, 2005, it was launched recently (August 2020) and so there is not a lot of real-time data.
Given the momentum bias, the stocks, and by extension the sectors picked up will mostly be the ones that market favours at that point in time. The maximum stock weight is capped at 5 per cent. Currently, IT makes up 30.7 per cent of the overall composition, followed by commodities (19.4 per cent), consumer (17.6 per cent), financial services (10 per cent), utilities (5.6 per cent), healthcare (5.1 per cent), telecom (5 per cent), manufacturing (3.1 per cent) etc.
Since December 2017, IT sector has seen the highest sector exposure in the index. Top 10 holdings of the index currently are Titan, Apollo Hospitals, Mindtree, Bajaj Finserv, Wipro, Bharti Airtel, Tata Motors, Infosys, SBI and Tata Power.
Nifty200 Momentum 30 index gives you blended exposure to 30 high momentum stocks across the large- and mid-cap universe. At the moment, large-caps are more than 85 per cent while rest is mid-caps. The share of large-caps in the index has historically been over 65 per cent, hence skewed towards large-caps. The benchmark is rebalanced semi-annually (June and December), which is sub-optimal in today’s dynamic markets where momentum shifts rapidly.
Indicative total expense ratio for Motilal Oswal Nifty200 Momentum 30 Index Fund will be 1 per cent (regular plan) and 0.40 per cent (direct), while it will be 0.35 per cent for the ETF.
Tracking performance
Using the available point-to-point price return (1 and 5-year) data in latest (December 2021) factsheets of NSE indices, we compared Nifty200 Momentum 30 index with a few others to assess whether it is a good index alternative.
In both the 1- and 5-year periods, Nifty200 Momentum 30 is dominant against Nifty 50, Nifty Next 50, Nifty 200, Nifty100 Alpha 30 and Nifty Alpha Low-Vol 30. The extra return comes with higher volatility viz. standard deviation. The Nifty Alpha 50 --- which tracks the performance of 50 stocks with high alphas in last one year --- is the only index that has outperformed Nifty200 Momentum 30, but it is equally volatile.
The Nifty200 Momentum 30s has also showed the ability to steadily outperform broader indices such as Nifty 50, especially during market rallies. However, the performance takes a hit during corrections or flattish phases. This is the issue with any momentum strategy, as it is not a downside containment approach.
For Motilal Oswal Nifty200 Momentum 30 Index Fund, one would need to watch for the tracking difference. Peer UTI Nifty Momentum 30 from inception March 2021 to December 2021 has given 39.47 per cent return vs. 41.79 per cent for the index, translating to a tracking difference of 232 bps.
Our take
The Nifty200 Momentum 30 as an index is a strong performer against Nifty 50. But, don't use any Nifty200 Momentum 30 index fund or ETF as a substitute for your large-cap equity allocation. At best, it can be used in combination with other funds in your portfolio. The churn in momentum-based funds is generally very high compared to a broad-based index such as Nifty 500.
Going forward, if equity markets correct further, a momentum-based fund will not do well. But if you feel you want to ride the advantage of a positive upward trending market over the long term, this is a good bet. The caveat here is it might experience sharper and longer drawdowns.
Do note that ETF units are listed on stock exchanges and so one can buy and sell during market hours. You will need demat account to hold ETF units. There will be no exit load when you redeem ETF units. Since ETFs are traded on an exchange, they are bought or sold at the market price and not the NAV. The market price of an ETF is determined by its demand and supply. In case of the index fund, there is no demat account requirement, but exit load is applicable (1 per cent if redeemed on or before 15 days from allotment date). Also, the index fund route allows SIPs unlike the ETF.
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