There has been a flurry of new fund offers with Kotak Mahindra Mutual Fund recently launching the Kotak Nifty 200 Momentum 30 Index Fund on May 25, 2023. This open-ended scheme would replicate the Nifty 200 Momentum 30 Index.
The idea behind putting money in this fund is to benefit from the momentum-based investing strategy, which is indeed different from the growth investing style and value investing style that so many fund managers love to talk about.
The Nifty 200 Momentum 30 Index seeks to follow the performance of the top 30 Nifty 200 businesses based on their normalized momentum score. This score is determined by six-month and 12-month price returns, adjusted for volatility. This selection offers investors exposure to momentum stocks across market capitalizations and diverse sectors.
Nilesh Shah, Managing Director, Kotak Mahindra Asset Management Company said, “Momentum investing, the driving principle behind this fund, is a strategy that takes advantage of the persistence of stock price trends. It captures the potential of stocks that show a strong trend in price movement relative to the overall market trend. This approach to investing can be potentially beneficial during periods of economic growth. But one should keep in mind that momentum investing can be volatile. With the launch of this smart beta index fund, we further strengthen our overall passive fund offerings.”
Should you invest in the NFO?
In the last 10 years until April 28, 2023, the Nifty 200 Momentum 30 TRI yielded a 20 per cent CAGR, surpassing the Nifty 200 TRI’s 14 per cent returns. However, is it enough justification for investors to put their money in the Kotak Nifty 200 Momentum 30 Index Fund new fund offer?
Raj Khosla, Managing Director, MyMoneyMantra shared, “The first rule of mutual fund investing is that past performance is not a guarantee of future returns. Momentum investing has done very well in recent months because of the market upswing. The strategy tries to cash in on an uptrend in the market and has paid off due to the recent market rally. But the momentum theme can be very volatile and investors should be ready for violent ups and downs. It is a theme that would attract short-term and medium-term investors. In any case, momentum stocks and funds should not be in the core portfolio of the serious investor.”
Tanvi Goyal, Founder, Wealth Aware furthered, “This fund is an offering within the passive investment category, which is fast becoming a subject of discussion within families investing in equities. More and more people are keen to know about index investing and its benefits. With the obvious benefit of helping one save the costs over an actively managed fund, this fund will give the opportunity of investing in high-momentum stocks of Nifty, which can be potentially beneficial during periods of economic growth. But one should keep in mind that momentum investing can be very volatile and thus people with low tolerance towards volatility should invest cautiously. Investors need to always see how a particular product suits their personal needs and risk profile before chasing returns.”
Momentum investing may not help always
The recurring market shocks and continued volatility has caused many investors to adopt the value investing style, which implies buying stocks based on their correct valuations and then deciding their investment horizon accordingly.
Explaining why momentum-based investing can never really beat the age-old value investing style, Khosla added, “Momentum investing is the polar opposite of value investing, which identifies and buys stocks trading at a discount to their intrinsic value. To that end, long-term investors should focus on value funds which can be very rewarding if held for an extended period of time.”
Regardless of all the arguments in favour and against investing in this scheme, the most pertinent question that must be answered is if it is worth putting money in a new fund offer (NFO).
CA Kanan Bahl, a Finance Educator and Growth Consultant explains, “Even if someone is willing to invest in the Nifty 200 Momentum 30 Index, there are many other existing schemes. You may compare their expense ratios and tracking error to invest in them. Going forward, once there has been a considerable time post listing of Kotak Nifty 200 Momentum 30 Fund, you can compare their tracking error and expense ratios to understand if they are better than other schemes or not.”
Don’t just jump into the fray
Taking the discussion forward and explaining why investors must focus on factors beyond returns before deciding on a mutual fund investment, Rajani Tandale, Product Head – Mutual Fund, 1finance.co.in said, “Index funds outperform actively managed funds over time. Two important factors when choosing an index fund are the tracking error ratio and the expense ratio; both ratios in the lower category are deemed better. Kotak Mahindra AMC already has index funds like the Kotak Nifty 50 Index Fund and Kotak Nifty Next 50 Fund with well-managed tracking errors, but their expense ratios could be more competitive. Consider these factors along with your goals and preferences when selecting an index fund and avoid choosing funds based on past performance.”
Elucidating the unwarranted excitement surrounding the launch of this fund, Sharan Hegde, Founder & CEO, The 1% Club shared, “I understand that it is the jittery behaviour of investors and to an extent, some element of sub-standard levels of financial literacy. This problem arises when we are not taught about investing as a subject in schools or colleges and most people do not take investing (or any other subject) seriously after graduating even though it is such a critical topic.”
Jumping into an NFO does not help. It is like commencing a journey without being aware of the possible hurdles ahead. Mutual fund investing must be done after a lot of deliberation or else it may result in the addition of an underperforming fund in one’s investment portfolio.