Momentum Funds: Wide Return Gap & Strategy Differences

Momentum funds have demonstrated highly varied performance, with annual returns fluctuating sharply from -2% to 24%. This significant inconsistency is particularly noticeable in index-based funds during periods of subdued market activity, while several actively managed counterparts have delivered substantial returns.

Over the past year, active momentum funds recorded an average return of 9.2%. In contrast, index-based funds averaged just 1.8%, according to the ET Wealth Edition dated August 30, 2026. Top performers, such as Motilal Oswal Active Momentum Fund, achieved an impressive 23.9%.

Key Performance Metrics

• Annual Return Range: -2% to 24%
• Active Momentum Funds (Past Year Average): 9.2%
• Index-Based Funds (Past Year Average): 1.8%
• Motilal Oswal Active Momentum Fund (Top Performer): 23.9%

The disparate outcomes are primarily a result of the diverse strategies employed by these funds. While all momentum funds aim to capitalize on price signals, their proprietary models vary significantly in how they define momentum and execute their strategies.

Strategic Variances

• Momentum definition and look-back periods
• Rebalancing frequency
• Use of supplementary filters: earnings revisions, growth indicators, liquidity, quality, or valuation

Active funds possess the agility to adapt swiftly to changing sector leadership, enabling them to rotate out of positions with diminishing price strength. They can also strategically reduce equity exposure, favoring cash or fixed income during ‘anti-momentum’ phases.

The eligible investment universe further contributes to performance differences. A broader universe, encompassing up to 1,000 companies, can identify early opportunities in mid- and small-cap stocks. However, this approach may introduce increased liquidity and execution risk.

Sophisticated models within active funds often integrate macro momentum factors, including commodity price trends, institutional investor flows, and currency movements, alongside traditional technical indicators. This comprehensive approach explains the wide dispersion in returns observed across the sector.

Investors are advised to scrutinize beyond the general ‘momentum’ label. Understanding a fund’s specific underlying investment model, market cap mix, parameters, rebalancing schedule, and risk controls is crucial before making investment decisions.

Passive momentum strategies, despite their simplicity and rules-based nature, can suffer from ‘signal decay’ due to longer look-back periods and slower rebalancing, making them less responsive to rapid market shifts. Active funds, while offering faster adaptation and downside management, carry higher model risk, fund manager risk, turnover, and associated costs.

Momentum remains a well-established investment factor, despite recent challenges in sideways markets. Experts recommend treating momentum as a long-term factor allocation rather than a short-term timing strategy, acknowledging that investors should be prepared for uneven outcomes and periods of underperformance.