Investing can be classified as momentum or value investing, depending on various factors. Short-term investors who want a higher return in the volatile market may opt for momentum investing. They follow the herd mentality and prefer stocks that are on the rise. People who prefer undervalued stocks with strong fundamentals choose value investing.
But which one is suitable in the Indian Market? Which one should the investor opt for to achieve maximum returns? Let us get into the depths of this topic and understand the benefits and disadvantages associated with both of them.
Understanding Momentum Investing
Momentum investing is a strategy where investors buy stocks that have recently performed well in terms of price and sell those that have underperformed. This approach is grounded in the belief that stocks that are rising will continue to do so due to herd mentality and market psychology.
Key Features:
- Identifying stocks with upward price momentum is the main goal of momentum investing and trend following.
- Values technical analysis such as moving averages, MACD, and the relative strength index (RSI).
- Focus is on the short to medium term and is ideal for investors who keep a close eye on the market.
- Greater risk and return potential, as this strategy frequently produces rapid returns, but it can also be very volatile.
- Quickly adjusts to popular industries such as PSUs, Fintech, and EVs, as it is sector rotation friendly.
Pros of Momentum Investing:
- Possibility of rapid profits during market upswings.
- Makes use of investor sentiment and current trends.
- Works well for short-term trading strategies.
Cons of Momentum Investing:
- Extremely erratic and susceptible to market reversals.
- Prone to speculation and overvaluation.
- Calls for ongoing observation and technical know-how.
For instance, Adani Green, IRCTC, and Zomato emerged as momentum favorites in 2021 as a result of ongoing price increases fueled by media attention and retail participation.
Understanding Value Investing
Investors using the value investing strategy seek out stocks that the market has undervalued. Although these stocks are currently out of favour, they usually have solid fundamentals, such as steady cash flow, low debt, and earnings growth. Purchasing low and holding onto them until the market determines their actual value is the plan.
Key Features:
- It uses measures like P/E, P/B, and dividend yield to highlight intrinsic value.
- Returns compound over the years; patience is essential.
- Purchasing below the intrinsic value lowers the chance of a decline, providing a margin of safety.
- Perfect for defensive portfolios as it performs admirably during bear markets or economic downturns.
Pros of Value Investing:
- Margin of safety reduces downside risk.
- Perfect for preserving capital and generating wealth.
- Supported by the companies’ core strengths.
Cons of value investing:
- Requires patience, and there is potential for delayed returns.
- The danger of investing in value traps, which are inexpensive for a reason.
- May perform worse than growth or momentum stocks during bull runs.
For instance, ITC and Coal India were traditional value stocks that were long overlooked but provided investors with substantial returns after their growth improved in 2022.
Which One Is Better for the Indian Market?
Let us understand which investing is suitable in which situation and for what kind of investors.
Momentum Investing:
In India’s short-term market cycles, where trends are frequently influenced by global cues, sectoral buzz, or policy changes, it is suitable when:
- Events such as interest rate reductions, economic reforms, or encouraging global signals (such as the post-2020 rally) that drive the markets’ upward trend.
- Following government policy pushes, certain industries are being targeted, such as fintech, defence, electric vehicles, and PSU stocks.
- You trade actively and are comfortable with technical indicators such as moving averages, MACD, and RSI on a regular basis.
- You have a short to medium-term investment horizon and desire quicker returns.
- Since momentum stocks are more erratic and have a quicker turnaround, you can afford a higher level of risk.
Value Investing:
It is suitable when:
- You have a long-term investment outlook and plan to hold stocks for at least three years.
- You prefer well-established and reliable businesses that consistently generate cash flows, have little debt, and provide steady dividend payments.
- You have a lower risk tolerance as you are investing with a margin of safety in mind.
- You focus more on the company’s growth potential and are less influenced by daily price fluctuations.
Bottomline
The conclusion can be drawn that momentum investing is suitable for investors looking for short-term growth and who have a high risk-bearing capacity. On the contrary, for long-term investors with less risk appetite, value investing is the right option. Both of the investing options are popular among Indian investors. It depends on the economic situation and market trends.
Value investors rely more on the fundamentals of the company and are ready to purchase a stock when it is undervalued. Momentum investors prefer stocks that are already growing in the market. It is important to closely analyse the market before making a decision.