Nifty Midcap 150 Momentum 50 Index

Riding the Wave of Midcaps – 55x in 19 Years!

Introduction

Imagine a roller coaster that only goes up – that’s the thrill of momentum investing. Drawing inspiration from Newton’s first law, we know that an object in motion stays in motion unless acted upon by an external force. The same principle is applied in momentum investing. The Nifty Midcap 150 Momentum 50 Index is like finding those mid-sized companies on an upward trajectory and riding their wave of success. Instead of the old adage of “buy low, sell high,” this strategy embraces “buy high, sell higher.” It’s a fresh and exhilarating approach, perfect for those looking to shake things up.

What does the Nifty Midcap 150 Momentum 50 Index Track?

The Nifty Midcap 150 Momentum 50 Index tracks the performance of the top 50 stocks within the Nifty Midcap 150 Index, selected based on their momentum score. This score is calculated from a combination of 6-month and 12-month price returns, adjusted for volatility. In essence, it captures stocks that have shown strong performance recently, with the expectation that they will continue to perform well.

What methodology is used to calculate the index?

The methodology of the Nifty Midcap 150 Momentum 50 Index includes:

1. Selection Criteria: Stocks from the Nifty Midcap 150 Index with at least one year of listing history.
2. Momentum Score Calculation: Based on 6-month and 12-month price returns, adjusted for volatility.
3. Weighting Scheme: Combination of normalized momentum score and free-float market capitalization.
4. Exclusion: Non-F&O stocks hitting the upper or lower circuit 20% of the total trading days.
5. Rebalancing: Semi-annual review and rebalancing in June and December.
6. Capping: Stock weights capped at the lower of 5% or 5 times the stock’s weight in the index based on free-float market capitalization.

How did the Nifty Midcap 150 Momentum 50 index perform over time?

The index has consistently outperformed its parent index, the Nifty Midcap 150, across various time horizons. For instance, from April 2005 to December 2022, the Nifty Midcap 150 Momentum 50 Index delivered a Compound Annual Growth Rate (CAGR) of 22.9% compared to 16.4% for the Nifty Midcap 150 Index.

Comparative Performance

• 1-Year: The Momentum 50 Index has a CAGR of 16.2%, whereas the Midcap 150 Index stands at 10.6%.
• 3-Year: The Momentum 50 Index outperforms with 20.4% versus 16.0% for the Midcap 150.
• 10-Year: Shows a strong lead with a 14.8% return compared to 11.2%.

The Volatile Nature of Momentum Investing

Despite its impressive returns, the Nifty Midcap 150 Momentum 50 Index does come with higher volatility. Over a 7-year period, the annualized volatility for the Momentum 50 Index is 18.9%, compared to 18.3% for the Midcap 150 Index. This heightened volatility underscores the risk inherent in momentum investing, where price swings can be more pronounced.

What are the stock constituents of the Nifty Midcap 150 Momentum 50 Index?

The Nifty Midcap 150 Momentum 50 Index comprises a diverse mix of sectors, highlighting the variety of midcap stocks included. The current constituents and their respective sectors and weights are as follows:

How has the index constituents evolved to give superior gains?

The Nifty Midcap 150 Momentum 50 Index has seen its constituents evolve significantly over time, adapting to market trends and ensuring continued superior performance. One notable change occurred in 2016 when Persistent Systems Ltd. and Lupin Ltd. were added to the index. Both companies had shown exceptional momentum in the tech and healthcare sectors, respectively, contributing to the index’s robust performance in subsequent years. Another significant shift happened in 2018, during which Polycab India Ltd. and Power Finance Corporation Ltd. were incorporated into the index. These additions capitalized on the strong momentum in the capital goods and financial sectors.

In 2021, the index saw the inclusion of Jindal Stainless Ltd. and Max Healthcare Institute Ltd., reflecting the growing strength in the metals and healthcare sectors. Each of these changes was driven by the rigorous momentum score calculation, ensuring that only the most promising stocks were included, thereby enhancing the index’s overall performance and delivering superior gains to investors. This dynamic adjustment mechanism is a testament to the index’s ability to capture the best opportunities in the midcap space.

What are the drawbacks of the index?

While the potential for higher gains is attractive, the momentum index also faces significant drawbacks during volatile market conditions. Historical data shows that during the 2008 financial crisis, the Nifty Midcap 150 Momentum 50 Index had a drawdown of 75%, compared to a 55% drawdown for the Nifty Midcap 150 Index. Between November 2021 and July 2022, a period of market sideways movement, the Momentum 50 Index experienced a maximum drawdown of 25%, whereas the Midcap 150 Index had only a 15% drawdown. Furthermore, during the sideways market from 2018 to 2020, the Momentum 50 Index showed higher volatility, with a drawdown of 25%.

How to Invest in the Nifty Midcap 150 Momentum 50 Index

For investors looking to capitalize on this momentum strategy, there are a couple of mutual funds that track the index:

Best Mutual Funds to Invest in this index

Currently, only two Asset Management Companies give offer this index:

1. Edelweiss Nifty Midcap 150 Momentum 50 Index Fund
2. Tata Nifty Midcap 150 Momentum 50 Index Fund

Conclusion: Embracing the Future of Momentum Investing

The Nifty Midcap 150 Momentum 50 Index exemplifies the potential of momentum investing to deliver superior returns. By focusing on midcap stocks with strong recent performance, this index offers investors an opportunity to capitalize on market trends. However, the inherent volatility and risk associated with momentum strategies must not be overlooked.

For those willing to embrace the challenges and rewards of momentum investing, the index represents a compelling option. With ongoing advancements in quantitative analysis and algorithmic trading, the future of momentum investing looks promising. As markets evolve, staying informed and adaptable will be key to harnessing the full potential of this dynamic investment approach.

By leveraging the power of momentum and employing sophisticated strategies, investors can ride the wave of midcap stocks to achieve impressive gains. The journey may be volatile, but for those prepared to navigate the ups and downs, the rewards can be substantial.