Since my Nifty accumulation SIP backtest based on momentum (HERE), I have been obsessed about trying to find a systematic approach to applying momentum strategies for multi-sector investment. The approach in this analysis is similar to the Nifty accumulation one. Based on accumulating fractional shares of whichever sector comes up with the system strategy. The investment is based on putting in Rs. 1000 everyday into whichever sector we get from the system. With the boom in ETFs happening currently, and almost all of them opting to split the NAVs to 2 digit values, its easier than ever to do this in real life.
The backtest though, uses raw values of sector index price for the calculations.
Time period: May 2013 – Sep 13 2022 (1974 data points)
Data set: CM bhavcopy published by NSE.
4 strategies were compared:
1. Invest 1000 everyday in risk free 7% compounding instrument.
2. Invest 1000 everyday into Nifty.
3. Invest 1000 everyday into the sector with maximum momentum.
4. Invest 1000 everyday into sector with minimum momentum.
The results were unsurprisingly, in favor of investing all into Nifty. The table below gives the final value of each instrument at the end of test period. The risk free compounding at 7% yielded Rs. 26,28852.
A glance at the table shows that, Max momentum concentrated most into Nifty IT, while Min momentum was more spread out and diversified. Also, Min momentum wins out over Max momentum for the final portfolio value (likely due to recent collapse of the IT sector).
Next, to observe changes in this equity over time, I graphed out the changes since 2013. I’ve split the graph into two for more detailed scrutiny (2013-2018, and 2019-2022).
I chose to divide the timeline at 2018 to highlight the relative outperformance of Nifty after that time. That is likely due to the start of EPFO investment into equity at the rate of 15% of entire corpus (the max limit set at that time). This is a crucial time to understand the effect that persistent big money flows have on the equity market.
This/next year they are planning to up the limit to 25%. When that happens, its gonna be another few years of huge outperformance.
Also in general, the value investing principle (buying the most beaten down sector) is an overall better approach compared to buying the max momentum sector. Notice the Min momentum strat mostly being in sync with Max or outperforming. For daily updates on sector momentum, THIS PAGE would be helpful.
Hope this was useful. Cheers…
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