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MUMBAI: Momentum is fairly a factor. For years now, some buyers have generated extra returns or alpha over a benchmark index by shopping for shares or different asset courses which have performed effectively in the current previous, and likewise eliminating laggards in their portfolio.
For buyers utilizing momentum investing methods in India, issues have gotten even higher in the post-lockdown rally. While the Nifty 50 index has risen 52% from its March lows, the Nifty Alpha 50 index has risen 79%. What’s extra, in the market’s fall between mid-February and end-March, each indices fell at the identical tempo. As a end result, the Nifty Alpha 50 index has ended up outperforming the broader market by almost 30% this 12 months.
The Alpha index consists of shares which have generated the highest alpha in the current previous, with even their weight in the index relying on the quantum of extra returns.
“With domestic institutions being sellers since early July, retail investors are driving Indian markets. In FY20 the average participation of foreign portfolio investors and mutual funds used to be ~25% of daily turnover. This has now come down to less than 15% in the last three months,” stated Rusmik Oza, govt vice chairman (head of basic research–PCG), Kotak Securities. It is the behavioural mindset of retail buyers to purchase shares which are already doing effectively or are on the transfer, he provides.
Clifford Asness of AQR Capital Management and co-authors, in a paper printed in the Journal of Portfolio Management, stated the existence of momentum is a well-established empirical truth. “The return premium is evident in 212 years of U.S. equity data (from 1801 to 2012) — as well as U.K. equity data dating back to the Victorian age.. in 40 other countries and in more than a dozen other asset classes. Some of this evidence predates academic research in financial economics, suggesting that the momentum premium has been a part of markets for as long as there have been markets,” they wrote.
Of course, all this is to not say that buyers can blindly comply with this technique. Like with all of investing, some checks and balances are wanted. “A key downside of this investment approach is that some stocks can turn illiquid when the market corrects. In simple terms, if momentum investing fetches extra-ordinary returns when the market is rally, during a correction the losses can be equally steep,” stated Andrew Holland, CEO, Avendus Capital Alternate Strategies.
Still word that regardless of the ups and downs, the Nifty Alpha 50 index has outperformed the broader market by an enormous margin post-crisis. It has risen by over ten occasions in comparison with the lows of March 2009, whereas the Nifty 50 index has risen by lower than 5 occasions.
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