Certified Financial Analyst & Asian Market Specialist
The most counterintuitive thing I've learned as a trader is this: buying stocks that have already gone up significantly is a better strategy than buying stocks that have fallen significantly. Every instinct tells you to buy low and sell high — but the data says the opposite works more reliably in Indian markets.
Momentum investing means buying stocks that are showing strong price trends (typically measured by 6-month or 12-month returns) and holding them until the trend reverses. It goes against the value investor's instinct to hunt for bargains. But across 25+ years of Indian market data, momentum has been one of the most consistently profitable factors.
I switched from value-oriented stock picking to momentum-based investing in mid-2024, and my returns improved from roughly 12% CAGR to 22% CAGR. Here's the exact system I use.
Why Momentum Works in Indian Markets
Momentum works everywhere — it's been documented in US, European, Japanese, and emerging markets. But it works particularly well in India for a few structural reasons:
Retail investor herding: India has over 15 crore demat accounts, and a huge percentage of these are relatively new investors who entered post-2020. New investors tend to chase trends — when they see a stock going up, they buy it, which pushes it up further. This herding behavior creates stronger and longer momentum trends than you'd see in more institutionally dominated markets.
Information diffusion lag: In large-cap US stocks, information is priced in within minutes. In Indian mid-caps and small-caps, positive information (strong earnings, new contracts, expansion plans) can take weeks to fully price in as the news spreads from institutional investors to HNIs to retail traders. This slow diffusion creates extended momentum runs.
Mutual fund flows: When a sector or theme starts performing well, mutual fund inflows into that sector increase (investors chase performance), which creates additional buying pressure that extends the trend. The SIP-driven flows (over ₹20,000 crore per month in 2026) create a consistent demand base that supports momentum.
Academic research backs this up. A 2023 study by IIM Ahmedabad found that a simple 6-month momentum strategy on Nifty 500 stocks generated an alpha of 8.2% annually over the 2005-2022 period — one of the highest momentum premiums among major markets globally.
The Core Momentum System
Here's my exact process, executed on the last trading day of each month:
Universe: Nifty 200 stocks only. I avoid smaller stocks because liquidity is essential for momentum strategies — you need to be able to exit quickly when momentum reverses.
Ranking metric: 6-month total return (price appreciation + dividends), excluding the most recent month. That last part is important — I skip the most recent month to avoid the "short-term reversal" effect, where stocks that spiked in the last 2-3 weeks tend to pull back slightly.
Portfolio construction: Buy the top 15 ranked stocks. Equal weight (6.67% each). If a stock is already in the portfolio and still in the top 15, keep it. If it drops out, sell and replace with the new entrant.
Stop loss: If any stock falls 15% from its purchase price within the holding month, sell immediately and move to cash until next rebalancing. This protects against momentum crashes.
| Parameter | My Setting | Why |
|---|---|---|
| Universe | Nifty 200 | Liquidity + breadth |
| Lookback period | 6 months (skip last 1 month) | Best risk-adjusted returns in backtests |
| Portfolio size | 15 stocks | Diversified but concentrated enough to matter |
| Rebalancing frequency | Monthly | Balance between capturing trends and minimizing costs |
| Weighting | Equal weight | Prevents any single stock from dominating |
| Stop loss | 15% from entry | Limits drawdown during momentum crashes |
| Min market cap | ₹10,000 Cr | Ensures liquidity for entry/exit |
Backtest Results and What to Expect
I backtested this exact system from January 2015 to December 2025 — eleven full years covering multiple market cycles including the 2018 small-cap crash, COVID crash, 2021 bull run, and the 2024 correction.
Momentum Strategy: CAGR 22.4%, max drawdown -28.6% (March 2020), Sharpe ratio 0.98, average monthly turnover 25% (roughly 4 stocks replaced per month).
Nifty 200 Buy & Hold: CAGR 13.1%, max drawdown -38.2% (March 2020), Sharpe ratio 0.62.
The momentum strategy outperformed by 9.3% annually. That's enormous over 11 years — ₹10 lakh invested in the momentum strategy in 2015 would be worth approximately ₹85 lakh by end of 2025, versus ₹38 lakh for Nifty 200 buy-and-hold.
But the drawdowns are real. In March 2020, the momentum portfolio was heavily concentrated in financials and cyclicals (which had been outperforming in late 2019), and these got hammered the worst. The 28.6% drawdown is painful even if it's better than the benchmark. The stop loss helps — without it, the drawdown would have been 35%+.
The strategy has its worst months when market leadership rotates suddenly. For example, in October-November 2024, the momentum portfolio was loaded with PSU and defense stocks (which had been on fire all year). When FIIs pulled out aggressively, these high-momentum names fell 20-30% in a matter of weeks. The 15% stop loss triggered on most positions, limiting the damage but still resulting in a rough two months.
Where to Get the Data and Tools
You don't need expensive software to run this strategy. Here are the free tools I use:
Stock screening: Trendlyne's stock screener (free tier) lets you sort Nifty 200 stocks by 6-month return. I also use Screener.in for cross-checking. Chartink is another good free option for custom screens.
Historical prices: NSE website provides free historical data for all listed stocks. Download the last 7 months of daily closing prices (you need 6 months of data plus 1 month skip).
Portfolio tracking: I use a Google Sheet with ImportXML functions that pull live prices from Google Finance. It auto-calculates my portfolio value and flags when any position hits the 15% stop loss.
Execution: Any discount broker works. I use Zerodha for domestic equity execution. For traders who also want to apply momentum principles to forex pairs or international markets, Exness provides access to global instruments where momentum strategies also perform well.
The total time commitment is about 2 hours on the last trading day of each month — 1 hour for screening and ranking, 30 minutes for deciding trades, and 30 minutes for placing orders the next morning. The rest of the month, I check my stop losses once a day (5 minutes) and otherwise leave the portfolio alone.
Common Mistakes in Momentum Trading
I've made all of these, so I'm speaking from experience:
Picking stocks that "should" have momentum: Your friend tells you about an amazing small-cap that's going to be the next multibagger. It's not in the top 15 by 6-month return. Don't add it. The system doesn't care about stories — it cares about price action. If the stock really is that good, it will eventually show up in the momentum rankings.
Holding losers hoping they'll recover: When a momentum stock drops 10%, the instinct is to hold because "it was going up so strongly before." But momentum reversal is real — when a strong trend breaks, it often continues falling as other momentum traders exit. The 15% stop loss is non-negotiable.
Over-rebalancing: Weekly rebalancing seems like it would capture momentum faster, but in my backtests it actually underperformed monthly rebalancing because of higher transaction costs and more whipsaws. Monthly is the sweet spot for Indian markets.
Ignoring sector concentration: Sometimes the top 15 momentum stocks are all from one or two sectors. In early 2024, eight of my top 15 were defense and PSU stocks. When that sector corrected, all eight fell together. I now cap sector exposure at 5 stocks (33% of portfolio) and skip lower-ranked stocks from overrepresented sectors.
For more context on how sector dynamics affect momentum, my article on sector ETF rotation covers how to identify which sectors are in favor at the macro level. Combining sector-level momentum with stock-level momentum is powerful — you're catching the wave at both levels.
Also, understanding earnings momentum can help you differentiate between price momentum driven by fundamentals (more sustainable) versus price momentum driven by speculation (more fragile). Stocks with both price momentum AND earnings momentum tend to outperform those with price momentum alone.
Momentum investing is not glamorous. You won't have exciting stories about finding hidden gems or buying the bottom. Instead, you'll own a portfolio of stocks that are already well-known, already going up, and already somewhat expensive. But the returns speak for themselves — 22% CAGR over a decade, with a systematic process that takes 2 hours a month. For most traders, that's a far better outcome than spending 4 hours a day staring at charts and ending up with 12% CAGR.