In the investment world, many debate whether to pick one style or the other: the short-term trend-riding of momentum or the patient bargain-hunting of value. But the real question many investors ask is: can momentum and value index funds coexist in a portfolio?
In this blog, we will explore what momentum and value funds are, how they differ, the benefits and risks of each, and how you might combine both in a portfolio for better diversification and smoother performance.
What are momentum and value index funds?
Value index funds follow indices that focus on companies trading below their intrinsic values determined by fundamentals, such as low price-to-earnings (P/E), low price-to-book (P/B), and high dividend yields. These are funds with a remarkable buy-and-hold philosophy, which means realising profits when the market eventually recognises a company’s true value. An example is the Nifty 500 value 50 index funds.
Momentum index funds, on the other hand, invest in stocks that have shown a proven positive price movement over a 6-12 month period. It is based on the assumption that a stock that is performing well will continue to do so, since it is driven by investor sentiment and capital flows. An example is the Nifty 500 momentum 50 index funds.
Key Differences between momentum and value index funds
Both the momentum and the value funds are focused on outperforming the market, but with different investment philosophies and investment time frames. By understanding these differences, investors can make better decisions about which strategy to follow, depending on their goals, temperament, and market expectations.
| Aspect | Value Investing | Momentum Investing |
| Investor Profile | Suited for patient, long-term investors focused on intrinsic value. | Appeals to active investors comfortable with short-term volatility. |
| Investment Philosophy | Buys fundamentally undervalued companies expecting price correction over time. | Buys stocks with strong recent performance, assuming the trend will persist. |
| Approach | The funds invest in stocks whose true value has not yet been recognised by the market. | Trend-following; buys when the market continues upward. |
| Type of Analysis | Relies on fundamental analysis of financial statements and valuations. | Driven by technical analysis, using charts and momentum indicators. |
| Time Horizon | Suitable for long-term investors; underlying holdings may take longer to realise their intrinsic value. | Also long-term in approach, though underlying positions may change more frequently as market trends shift. |
Why Combine Momentum and Value Strategies?
Combining momentum and value can assist investors in having a balance between growth and stability. The two factors perform differently in market cycles, providing a smoother performance over time.
Risk in Style Diversification
Value and momentum tend to work at divergent periods. Their combination minimises the effect of a poor performance of one style.
Balanced Return Potential
A mixed strategy helps to capture fewer undervalued opportunities, as well as the current price trends, which add to the long-term risk-adjusted returns.
Adapting to Market Cycles
In the past, momentum dominated in the upward markets, and value tended to fall in corrections. The combination can be used to deal with the changing market.
Better Investor Discipline
Value rewards patience, and momentum keeps investors working on growth phases, and both are equally helpful in ensuring disciplined and consistent investing.
When Might Coexistence Not Be Suitable?
While combining momentum and value strategies can enhance diversification, it isn’t ideal for every investor. Your time horizon, risk tolerance, and portfolio involvement play a key role in determining whether a dual-style approach fits your goals.
- Short Investment Horizon: If your horizon is less than a year, momentum reversals can occur quickly, and value may not have time to recover.
- Low Risk Tolerance: Investors uncomfortable with drawdowns or volatility may find momentum strategies too unstable during market corrections.
- Preference for Simplicity: If you prefer a hands-off approach and minimal rebalancing, a single broad-market index fund might be more suitable.
- Limited Portfolio Size: For smaller portfolios, managing two-factor funds may increase costs and complexity without meaningful diversification benefits.
Conclusion
Yes, momentum and value index funds can absolutely coexist in a portfolio. In fact, combining them can offer the benefits of diversification, smoother performance, and exposure to different market regimes. The trick is that the styles are associated with their respective behaviour, risk, and return profile. You can develop a strong portfolio by determining your allocation, choosing the appropriate funds, rebalancing when needed, and being disciplined.
In an era where you don’t need to choose “either/or,” you can choose both, provided you respect the nature of each strategy and stay aligned with your investment goals.
