Active momentum funds beat the Nifty 500, here is how they work

Active momentum funds have beaten the broader market over the last three and six months, a stretch that included the US-Iran war scare and a sharp recovery.

In the three months through July 23, the funds returned an average of about 6.4%, against 1.2% for the Nifty 500 total return index and negative 0.7% for the Nifty 50 TRI. Over six months, the average was close to 10.8%, versus 1.8% for the Nifty 500 and negative 4.1% for the Nifty 50. The spread was wide – from 3.7% to 15.2% – reflecting the different models these funds run.

Momentum investing means buying stocks that have been rising and selling those losing steam. Passive funds do this mechanically by tracking an index like the Nifty500 Momentum 50, ranking stocks on six-month and one-year price returns and rebalancing twice a year. Active funds run their own rules, and those rules differ sharply.

Some anchor to earnings rather than price. ICICI Prudential and Kotak AMC run earnings-momentum funds. "Our strategy is based on earnings momentum, not price momentum. We look for companies where the earnings trajectory is improving and earnings are coming in better than market expectations," said Manasvi Shah, fund manager at ICICI Prudential AMC. The fund assesses earnings trends over the previous three quarters and adds a qualitative review of company news and management actions, to avoid betting on a single strong quarter.

Others blend price momentum with a quality filter. Motilal Oswal applies its momentum model on top of stocks already under its research coverage, vetted through the firm's QGLP – quality, growth, longevity and price – framework. "We apply our proprietary momentum model, which generates investment ideas and suggested allocations. The quality filter remains intact because every stock is already under active coverage," said Ajay Khandelwal, head of equity at Motilal Oswal AMC. "If a stock has shown no meaningful price movement over the last three to six months, it generally will not feature in this scheme."

Nippon India's fund blends price and earnings momentum but can shift between aggressive and defensive modes. Its model tilts toward higher-risk stocks when the market is recovering and toward steadier names when the market looks overheated. It uses signals such as how broad the rally is to decide when to switch.

At the other end are pure price-momentum funds – Samco, Union and the newly launched NJ Momentum Fund. Even within this group, approaches vary. Samco's model leaves room for the manager to act between scheduled rebalances. NJ's is fully rule-based with no manager discretion. Union AMC allows its manager to exit a stock mid-cycle if an adverse event threatens value.

What all of them promise over a passive fund is faster rebalancing and a wider hunting ground. Samco's universe spans about 750 stocks. Union screens the top 1,000 by free-float market cap. "Faster rebalancing is one of the biggest advantages of an active momentum strategy," said Umeshkumar Mehta, chief investment officer at Samco AMC.

Momentum's weak spot is that it can fall hard when trends reverse. Active funds try to manage that in different ways.

Samco hedges. "If markets decline, we hedge the portfolio through futures of underlying shares or by exiting stocks where futures are not available, to reduce net equity exposure," Mehta said. In almost all of March 2026, during the peak of US-Iran war tension, the fund was hedged by 50%. Half its portfolio had zero net equity exposure. By early April it went back to 100% equity. The strategy can, in principle, cut net equity exposure sharply in a prolonged bear market.

ICICI Prudential leans on its earnings signal and a tilt toward larger companies when conditions turn. "The strategy is market-cap agnostic, drawing its investment universe from the Nifty 500 Index. While it can invest across large-, mid- and small-cap stocks, allocations are driven by earnings momentum rather than market capitalization. As a result, the portfolio may tilt towards large-caps when they offer stronger earnings visibility," Shah said. She noted the strategy is likely less effective during prolonged sideways markets, where the absence of clear earnings momentum limits the opportunity.

Union's fund raises cash in what it calls 'anti-momentum' phases. "During periods of anti-momentum, we try to raise cash levels to permissible limits under the investment mandate to protect the downside," said Gaurav Chopra, fund manager at Union AMC. The fund does this when its model throws up relatively few stocks that clear its momentum tests. Liquidity, he said, is a critical input – the fund holds only companies that are widely owned and traded, keeping impact costs low during rebalancing.

"We monitor the portfolio on a daily basis. If price momentum weakens, we can reduce or exit positions without waiting for the next earnings update," Khandelwal said.

Financial advisors say investors should first understand the risks of the factor itself. "Momentum as a factor has done well in Indian markets over the long term. A momentum strategy paired with certain qualitative filters can also build some quality checks into the portfolio, which is what active momentum funds seek to do," said Kavitha Menon, founder of Probitus Wealth. She cautioned that momentum can still see sharper corrections when markets fall, unless the fund's model has strong controls for the downside.

Because active momentum funds are still new, they should ideally be given time to build longer track records. Investors should watch how these funds participate in both the upside and the downside before considering them.