While investing in mutual funds, one might wonder whether to invest in a plain index fund, or a high-risk active fund, or else — keep the head low, and choose a debt fund.
There is, however, another option i.e., to follow the middle path and embrace strategy index funds that invest as per a pre-decided strategy within a broader index. For instance, there is Nifty200 momentum 30 index that tracks the performance of the top 30 companies in the Nifty200 based on their momentum. Likewise, there is a Nifty 100 low volatility 30 index fund that tracks the performance of top 30 stocks with least volatility.
The funds which track such niche indices can be known as ‘strategy index funds’, but they are primarily index funds for the simple reason that they track an index, albeit not a vanilla index but a specific one.
Strategy funds in India
Motilal Oswal opened a new fund offer (NFO) of Nifty 200 momentum 30 index fund in January this year. Similarly, UTI mutual fund also rolled out an NFO for this index fund in February 2022.
UTI MF invites prospective investors by highlighting that the fund’s purpose is to track the performance of 30 high momentum stocks within Nifty200.
“Stocks based on their six months and 12 months volatility-adjusted returns are considered to be part of the overall portfolio,” writes the fund house in in its NFO advert.
Strategy of investing based on stock trends is known as momentum investing. Experts say that these funds – based on momentum or volatility — follow proven strategies to maximise returns. For instance, when a few stocks have gained a momentum or are less volatile than their peers in the same index, then a portfolio comprising these select stocks is expected to outperform the index.
“A trend doesn't just highlight what has happened in the past but also gives certain inferences of what can be expected in the future,” asserts Sharwan Kumar Goyal, Fund Manager, UTI Mutual Fund.
The investment strategy of momentum is already popular in other global financial markets, although they are at a nascent stage in India, argues Aman Singhania from NSE India.
“The investing style of momentum investing is not new. As per one international study, you can generate significantly higher returns by buying recent stock winners and selling recent losers,” says Aman Singhania, VP & head, Index development & Research, Fixed Income Valuation & analytics, NSE India.
However, one must exercise due caution before taking a plunge into such niche funds, and embrace an investment style that one is well acquainted with.
“From an overall investment perspective, it would be better to consider a broader index like the Nifty 50 Index. However, in the Nifty 100 Low Volatility 30 Index, the company with the lowest volatility will have the highest weight. These funds offer an investment option to investors who would like to invest in less volatile companies based on their past performance,” says Harshad Chetanwala, Co-founder of MyWealthGrowth.com.
Experts also advise investors to align their strategies with their risk appetite. “Investors looking for less volatile portfolio may consider low volatile strategy while people comfortable with increased risk may invest in return seeking-strategy like momentum,” says Mr Goyal.