Optimism is in the air and the market is booming with Initial Public Offerings (IPOs) as companies look to raise funds from the public. Meanwhile, hopeful and confident investors fuelled by optimism and confidence are eagerly applying for these opportunities.
Latest data from the Association of Mutual Funds in India (AMFI) highlights the significant growth of the Indian mutual fund industry over the past year. Assets under management (AUM) have grown significantly over the past five years, driven by factors such as rising disposable income, growing awareness of mutual funds and robust stock market performance.
Momentum investing has become increasingly popular recently, especially in the current bull market. This strategy focuses on taking advantage of upward trends and can be very profitable in optimistic market environments. It primarily targets short-term gains, making it appealing to investors looking to make quick gains.
Understanding the psychology that drives momentum investing
Momentum investing involves buying assets (usually stocks) that are currently rising in price and selling them when this trend starts to lose momentum. The strategy aims to generate profits by taking advantage of continued stock price increases.
Momentum is unpredictable, and many trends can lose momentum quickly. Momentum investing typically requires frequent buying and selling, which can increase portfolio volatility. So what motivates investors to take part in this unpredictable journey that is not always smooth sailing and can involve difficult times when markets are thrown into turmoil by corrections due to sudden rumors or unexpected news?
Essentially, momentum investing operates on the assumption that short-term trends tend to continue, so stocks that are rising are expected to continue to rise and stocks that are falling are expected to continue to fall.At the heart of any long-term bull market are momentum investors who focus on stocks that have shown significant gains in a recent period, such as the past few months or year.
These investors frequently utilize technical indicators (charts and mathematical formulas) to analyze past price movements and predict future trends. Long-term investors do not engage in this fast-paced strategy of buying and selling quickly for short-term gains. Momentum investing is fundamentally influenced by psychology. This strategy is based on the belief that investor emotions can amplify trends. When a stock price rises, more investors join in and push the price further up based on this momentum (FOMO – fear of missing out).
Recognize the duality of risk and reward
Investor enthusiasm can sometimes cause stock prices to exceed their intrinsic value. Momentum investing has both potential rewards and risks. Even in bull markets, downturns can occur. There is no guarantee that past top performers will maintain their momentum. Momentum strategies, characterized by frequent trading, can increase portfolio volatility. Stocks that have been rising sharply can suddenly reverse direction, leading to unexpected losses. Even in bull markets, downturns can occur unexpectedly. Momentum funds typically focus on stocks that have performed well recently, but they can be particularly vulnerable during market corrections.
Momentum investing offers an opportunity to capitalize on short-term trends, but it is not a foolproof strategy. Momentum stocks may be diversified and increase returns when included in smaller “satellite” segments of a portfolio, but they should not be core holdings. Momentum stocks’ performance should have a positive impact on the overall portfolio growth. If they do not facilitate the achievement of goals or impede progress, they may not be a good fit. In a well-diversified portfolio, each holding should have a clear objective. Momentum stocks without a positive impact may just add unnecessary complexity.
3.6 Million Indians visited us in a single day and chose us as their platform for Indian General Election Results. Check out the latest updates here!
