Definition
Momentum Factor
The momentum factor captures the tendency for stocks that have performed well recently to keep outperforming in the near term, and recent losers to keep lagging, over horizons of roughly three to twelve months.
Indian momentum indices such as Nifty200 Momentum 30 rank stocks by trailing risk-adjusted returns and rebalance periodically to hold the strongest performers. The factor has delivered strong long-run returns but with sharp, sudden reversals known as momentum crashes, typically after market bottoms.
Because momentum has high turnover, transaction costs and slippage materially affect net returns, an important consideration in Indian markets with STT and impact costs. Momentum is often paired with value in a multi-factor model, since the two are negatively correlated and tend to offset each other's worst periods.
Related terms
- Trend FollowingTrend following is a strategy that buys assets whose prices are rising and sells or shorts those that are falling, on the premise that established trends tend to persist for some time.
- Factor InvestingFactor investing is the systematic targeting of securities with specific measurable characteristics, called factors, that academic research has linked to higher long-run risk-adjusted returns.
- Multi-Factor ModelA multi-factor model combines several return factors, such as value, momentum, quality and low volatility, into a single framework to score and weight securities, diversifying across drivers of return.
- Value FactorThe value factor is the tendency, documented in long-run data, for relatively cheap stocks, measured by ratios like price-to-earnings or price-to-book, to outperform expensive ones over time.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.