NFO Pick – (Motilal Oswal Active Momentum Fund)

3 Mar 2025 , 03:43 PM

WHAT IS MOMENTUM INVESTING; AND WHY DOES IT WORK?

The Motilal Oswal Active Momentum Fund is a thematic fund with momentum as its key theme. Momentum investing refers to the strategy of investing in those stocks that have displayed strong past performance, especially in the recent past. The expectation is that they will continue to outperform in the near future. In momentum investing, price is king and the recent stock price performance forms the basis for entry / exit in a stock. Let us also look at why this momentum investing tends to work in practice.

The momentum effect shows that past winners (recent past) continue to win in the future also. There are several reasons why momentum works. Firstly, trends tend to persist for a long time as investors gradually buy into these trends. Secondly, fear and greed leads to herd behaviour and that also is a key reason why momentum as a strategy tends to work in the stock market context. Lastly, there is the price feedback loop that causes good performance to attract more flows, which, in turn, underlines the performance. The key lies in catching the momentum shifts early.

MOTILAL OSWAL ACTIVE MOMENTUM FUND – PROOF OF THE PUDDING

The proof of the strategy lies in the empirical performance and this is what we can infer.

• Momentum investing is market cap agnostic. In fact, it properly guides the investment into the capitalization basket where there is maximum favourable momentum.
• If one looks at blocks of quarterly performance, once momentum is established, it tends to continue for 3-4 quarters, giving enough time for fund managers to play the trend.
• In the last 20 years, the Nifty 50 TRI is up 15X, while the Nifty 500 Momentum 50 is up 60X. That translates into CAGR returns of 14.5% for the Nifty and 22.9% for the Nifty 500 Momentum 50 TRI.
• In the last 20 years, the Momentum index has given negative returns in 6 years with larger drawdowns than the Nifty. In the remaining 14 years when Momentum has given positive returns; it has beaten the Nifty in 13 of these 14 years.
• Overa a 1-year period, the momentum index has struggled, but any period beyond 3 years, it has convincingly outperformed the Nifty 50 index.

Let us quickly turn to the key momentum strategy investing strategy of the fund.

MOMENTUM INVESTING PROCESS FLOW AT MOTILAL OSWAL

The Motilal Oswal Active Momentum Fund will select stocks based on momentum driven stock selection, filtering on governance, filtering on risk adjusted returns, and monthly rebalancing of the portfolio. The portfolio of the Motilal Oswal Active Momentum Fund will represent the house theme to the tune of 65% while there will be 10% provision for risk mitigation and the balance 25% will be at the discretion of the fund manager.

The top 500 stocks by market cap will be the starting universe of the fund. From these, stocks will be filtered based on momentum across multiple time frames. These high momentum stocks will be further filtered to remove stocks with unfavourable fundamentals. The top-30 stocks now will be equal weighted in the portfolio. The portfolio of the fund will be rebalanced on a monthly basis; and this iteration will continue.

GLANCE AT THE MOTILAL OSWAL ACTIVE MOMENTUM FUND NFO

Here are key details of the Motilal Oswal Active Momentum Fund NFO.

• The NFO opened on February 24, 2025 and closes on March 10, 2025. Regular sale and repurchase of units at NAV linked prices will start within 15 days after closure.
• On the risk-o-meter, Motilal Oswal Active Momentum Fund is classified as “Very High Risk” due to its predominant concentration on momentum theme in equities.
• Investment objective is to use active momentum as the theme and beat the performance of the Nifty 500 Total Returns Index (TRI) over a longer time frame.
• There is no entry load. Being an active momentum fund, there will be an exit load of 1% of redemption value if redeemed within 3 months of the date of allotment. There is no exit load on holdings beyond 3 months. Exit load will apply on inter-scheme switch also.
• Motilal Oswal Active Momentum Fund offers Regular and Direct plans. Additionally, the fund also offers the Growth option and the IDCW option to investors. Ajay Khandelwal, Varun Sharma, and Rakesh Shetty constitute the fund management team for the fund.
• The minimum application in the NFO and additional purchases will be ₹500 and in multiples of ₹1. Redemption can be minimum of ₹500 or available units in the account.
• Motilal Oswal Active Momentum Fund will be treated as an equity fund. STCG (less than 12 months) will be taxed at 20.8% (including cess). LTCG (over 12 months) will be taxed at 12.5%, after a minimum tax-free LTCG threshold of ₹1.25 Lakhs per annum.

The Motilal Oswal Active Momentum Fund offers a template for using momentum as the theme for outperforming the Nifty 500 TRI index. While returns are not assured, the historical experience of the momentum theme has been relatively encouraging.