As we prepare to sunset Capitalmind Premium and Capitalmind Smallcase, one of the big questions we’ve heard from subscribers is: “What happens to the Capitalmind Momentum portfolio?”
The TLDR answer: Shift to Capitalmind Flexi Cap Fund – adaptive momentum with dynamic factor tilts and Mutual Fund tax efficiency.
Read on for our clear rationale for what’s different about the Capitalmind Flexi Cap Fund and how it might have a place in your portfolio.
Momentum has been a key consideration in our approach to investing at Capitalmind. When we first published on the prevalence of the Momentum factor in Indian markets, Momentum was still a niche, under-researched style of investing, especially in India. Since then, in large part due to its resounding success, many players have jumped on the bandwagon. In addition to PMS’s offering similar approaches, many AMCs have launched some version of thematic funds investing based on the momentum factor.
In the meantime, the tax regime has changed, with a significant change to both Long-Term and Short-Term Capital Gains Taxes in the 2024 budget.
This introduced two questions for us to answer for investors:
- With so many offerings referring to Momentum, does how we at Capitalmind practice momentum investing need to evolve?
- Should the increase in short-term capital gains taxes, which account for the bulk of the gains in a high-turnover strategy like Momentum, necessitate a change in how investors need to think about allocating to such a strategy?
Short Answer: Yes. And Yes. Let’s walk through the thought process.
The Momentum Factor has a solid track record
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The table summarises the performance of various well-known factors over two decades. Momentum has the strongest track record of the factors, delivering higher returns with comparable volatility. That Momentum has been a strong driver of long-term returns is evident from the above table.
But a momentum-only approach has had an indifferent time in the last 12-24 months.
As of the time of publication, momentum has had an indifferent period in recent times. Folks invested in Capitalmind Momentum would’ve experienced that pain.
Now, keep in mind, two strategies following the same factor can have significantly different performance owing to the way they define the factor. For instance, momentum can be defined as the last 12-month return skipping the last 1 month, or the last 12 months without skipping the last 1 month. Both strategies are momentum strategies, but would likely pick different stocks at each rebalance.
And that’s just two variants. You could define momentum as the return over the last 6-months, average it over the last 6 and 12 months, and you realise the possibilities are endless.
So one of the questions in our minds was whether the way we define momentum has been a problem. We looked through various research papers and methodologies used to define momentum.
The table below shows the recent performance of over 25 different momentum variants:
The table shows that the last 1-year has been poor for any kind of single-factor Momentum-driven strategy.
Periods like these can make it challenging to stay invested in your chosen style, especially when the broader markets have done relatively better.
What we have so far:
- Momentum has done exceptionally well over the long term as a factor in Indian markets
- But it has done particularly poorly in the last 12-24 months
- With the growing popularity of momentum, there are now several pure-momentum strategies
Enter the Capitalmind Flexi Cap Fund
Capitalmind Flexi Cap primarily allocates to momentum but shifts its allocation from momentum to alternative factors in times when traditional momentum is undergoing a challenging period.
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The Capitalmind Flexi Cap Fund has a two-stage process of deciding allocation; at the overall market level and deciding between its primary and alternate allocations.
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This framework allows exposure to the proven momentum factor with exceptions during specific market conditions, where it allocates to alternate factors, including but not limited to Quality, Low Volatility, Value, among others.
This allows a certain flexibility in the process, as evident in the backtest spanning 2007 to June 2025.
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Summarising the key characteristics of the Capitalmind Flexi Cap Fund
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The full presentation is available on the Capitalmind AMC website here.
The taxation advantage you cannot ignore
The table summarises the key changes to capital gains taxes over the last two decades.
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In a high-churn Momentum strategy, most gains tend to be short-term (< 12 months), which gets impacted by the 2024 increase in STCG from 15% to 20%. The table below shows the illustrative incremental return from tax savings in a Mutual Fund over the exact same returns using direct stock investing.
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The difference between investing directly in a momentum strategy and doing so through a mutual fund becomes more apparent over the long term. Investing through a Mutual Fund offers significant tax advantages, especially in a higher churn strategy like Momentum.
Takeaway
If you’ve kept the faith in Momentum Investing and particularly in the way we’ve done it at Capitalmind, then one way to continue is to move your allocation to the Capitalmind Flexi Cap Fund. It is an adaptive strategy that moves between momentum and alternative factors when market conditions change.
Two big caveats to keep in mind when deciding to invest:
- Consider your individual risk profile: By no means should you consider this as investment advice since the suitability of any investment in your portfolio depends on your very individual risk profile.
- Time Horizon: This will sound like a broken record, but only invest if you can give it atleast five years of time. While momentum has struggled in the recent past, other factors have not exactly done spectacularly. Any lower time horizon has a significant chance of being disappointing. A big part of the edge in quantitative investing is the behavioural edge of being able to stay invested.
Here’s a summary of points about who we think is suited to invest:
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The Capitalmind Flexi Cap Fund is now available to invest directly on the Capitalmind AMC Website and all major Mutual Fund investment platforms:
My Experience with Momentum Investing
Over the last four years, I have spoken to many investors in our Momentum portfolio, and honestly, I have seen a bit of everything. Some came in early and stuck with it. Others entered after a strong run-up, only to panic in the next 3 to 6 months when the portfolio went through a rough patch. They pulled out, convinced the strategy had stopped working, and often, it was just a cycle turning.
This pattern isn’t rare. In fact, it’s pretty common.
And I get it. I would probably feel the same if I were on the other side. When a strategy does really well and then starts to underperform right after you enter, it can shake your confidence. It feels like bad timing. And in momentum, that’s very possible, because momentum works in cycles, and when it’s not working is often the best time to enter (not a recommendation, just an observation). But emotionally, that’s a tough call to make.
What I have realised over these years is that the biggest challenge with momentum isn’t understanding how it works, it’s being able to stick with it when it doesn’t. There’s no easy answer to this. But I have found that the more someone understands the nature of the strategy, that it won’t always work, but it tends to over time, the easier it becomes to stay invested through the ups and downs.
The biggest takeaway is finding a strategy you understand and can stay with.
If you understand and prefer the Capitalmind way of Momentum, you know who to contact 🙂
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
Past performance of the strategies / schemes is neither an indicator nor a guarantee of future performance and may not be considered as the basis for future investment decisions.
Disclosure: Capitalmind Financial Services Private Limited (formerly known as Wizemarkets Analytics Private Limited) is a SEBI-registered investment management firm based in Bengaluru, India. It operates as a Portfolio Manager (INP000005847) and manages Capitalmind Select India One, a Category III Alternative Investment Fund (IN/AIF3/23-24/1357). Research services are provided by Capitalmind Research LLP, a SEBI-registered Research Analyst (INH000014003). Capitalmind AMC is a wholly-owned subsidiary of Capitalmind Financial Services and will act as the investment manager to Capitalmind Mutual Fund (MF/084/25/10).
This report has been authored by the team and reviewed by Jay Dhruv, Research Analyst, and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific view(s) in this report.
Research Analyst or his/her relative or Capitalmind Research LLP may have a financial interest in the subject company. Also, the Research Analyst, his relative, Capitalmind Research LLP, or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or Capitalmind Research LLP or its associate may have a conflict of interest at the time of publication of this research report.
Capitalmind Research LLP is a SEBI Registered Research Analyst having registration no. INH000014003.
