Trading Guide: What is Momentum Investing; Why and when should one go for it?

by Zee Business

Published On Feb. 15, 2022

In this article

In this article on Zee Business , Sonam Srivastava, Founder, Wright Research, explores momentum investing in the Indian equity market, where past returns are used to predict future returns. Despite concerns about chasing performance, momentum investing has proven successful in India, leveraging the country's growth market status. It captures both fundamental changes and investor biases, but it requires active portfolio management to adapt to changing trends. While momentum works best in strong markets, it is not a buy-and-hold strategy and carries risks such as underperformance during trend breakdowns and potential overvaluation. However, with India's growing economy and expectations of a cyclical recovery, momentum investing is likely to remain favored, albeit with the need for careful risk management and diversification.

“Momentum is one of the strongest factors describing stock market returns globally, and it works incredibly well in India, given that India is a growth market.”

- Sonam Srivastava, Founder, Wright Research

Here’s the gist:

  • Momentum investing is a popular factor influencing equity market returns, based on the predictive power of past returns in influencing future returns.

  • Momentum investing works well in India, given its status as a growth market.

  • Momentum is linked to fundamental changes in value and captures investor biases such as underreaction, overreaction, herding, and confirmation bias.

  • The strategy involves identifying trends in the market and taking advantage of them for long-term returns.

  • Momentum works best in strong markets and requires active portfolio management.

  • Momentum investing comes with risks, including underperformance during trend breakdowns and getting trapped in overvalued stocks.

  • Risk controls, profit targets, stop losses, and diversification can help mitigate the risks of momentum investing.

  • Momentum investing has been successful in India due to its high growth economy, and is expected to continue performing well in the future.

  • Investors with a higher risk tolerance should consider investing in well-managed momentum strategies.

You can read the full article here on Zee Business.

To learn more about Momentum Investing check out these articles

  1. What is Momentum Investing? A Comprehensive Guide to Understanding Momentum Investing
  2. History of Momentum Investing ⚡️
  3. Why Momentum Investing?
  4. Momentum Investing: Risk, Reward & Everything Else
  5. The Multibaggers of Momentum
  6. Momentum is an amazing Long Term strategy
  7. Complete guide to Momentum Investing & the Wright Momentum Portfolio

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