Max Life Nifty 500 Momentum 50 Fund: A Smart Investment

A majority of investors might agree that long-term wealth creation is one of their top financial goals, but, they might not always agree on how best to achieve this. While some might prefer to opt for a strategy that focuses on potentially high-growth equities such as small-capitalization or mid-capitalization stocks, others might prefer diversifying their investments through a flexicap approach. Similarly, some want to implement a value investing approach, while others might opt for a very different strategy such as momentum investing.

The Max Life Nifty 500 Momentum 50 Fund is a unique proposition that combines the benefit of diversification offered by flexicap investments with the potentially high returns offered by the momentum investment strategy into a single package.

What’s more, this fund will be available through existing and new ULIP offerings of Max Life such as Max Life Online Savings Plan (UIN:104L098V06), Max Life Fast Track Super Plan (UIN:104L082V04), Max Life Flexi Wealth Advantage Plan (UIN:104L121V02), etc. that offer the benefit of life cover along with market-linked growth.

So, let’s find out more about the Max Life Nifty 500 Momentum 50 Fund to determine if it is a suitable option for you.

What is the Max Life Nifty 500 Momentum 50 Fund?

The Max Life Nifty 500 Momentum 50 Fund is an index fund that will track the Nifty 500 Momentum 50 Index. This index fund will thus invest in the 50 stocks that are part of the Nifty 500 Momentum 50 Index while replicating the weight of individual stocks in the same way as the index being tracked. The objective of the scheme will be to mirror the performance of the chosen index within the margin of tracking error.

The equity orientation of the index ensures that it is ideally placed to deliver market-linked long-term returns to the investor while protecting life cover as it is available through various Max Life ULIP plans.

One should also keep in mind that since this is a passively managed index fund replicating the Nifty 500 Momentum 50 Index, investors can be assured of a high degree of transparency along with the assurance that there will be no fund manager bias in the stock-selection procedure.

Now you might wonder how this index fund incorporates a flexicap approach along with a momentum investment strategy. To understand this, let’s take a closer look at the Nifty 500 Momentum 50 Index.

What is the Nifty 500 Momentum 50 Index?

The Nifty 500 Momentum 50 Index can be defined as an equity-oriented strategy index that comprises a basket of 50 stocks selected based on their normalized momentum score from the broad-based Nifty 500 Index.

Stocks that are included in this momentum index are listed equities that are part of the broad-based Nifty 500 Index. Stocks with low liquidity are automatically eliminated from consideration. Next, the individual normalized momentum scores of these stocks is calculated. This is done by calculating the 6-months and 12-month price return of each stock adjusted for volatility.

The top 50 stocks ranked based on their normalised momentum score are selected for inclusion into the Nifty 500 Momentum 50 Index. Next, the individual weight of each stock is calculated by using a combination of the stock’s normalized momentum score and the free float market capitalization of the individual stock.

As per the stock selection methodology provided by NSE, the maximum weight of an individual stock will be capped at 5% or 5 times the weight of the stock in the index based only on free-float market capitalization. Historically, this strategy index has outperformed the parent Nifty 500 index as shown below:

Source: Niftyindices.com. Returns Data as of 28 June 2024.

Note: The above returns are index returns and may not be indicative of the future performance of the Max Life Nifty 500 Momentum 50 Fund.

While it is clear that historically the Nifty 500 Momentum 50 Index has outperformed its parent index overall, i.e. in the short, medium as well as long term, it does not imply that this outperformance will continue in the future. However, an index fund like the Max Life Nifty 500 Momentum 50 Fund that tracks the Nifty 500 Momentum 50 Index would attempt to replicate the performance of the index within the margins of tracking error.

Since the Max Life Nifty 500 Momentum 50 Fund will mirror this index, its portfolio will feature the same stocks with the same weight as the index being tracked. Notably, the parent index Nifty 500 includes stocks belonging to large, mid as well and small capitalization categories. As a result, the fund will also feature a flexicap approach along with the incorporation of the momentum strategy as part of its overall stock selection methodology.

https://www.niftyindices.com/Methodology/Method_NIFTY_Equity_Indices.pdf

Key Investments of the Max Life Nifty 500 Momentum 50 Fund

This fund is an equity-oriented investment so it is required to invest between 80% to 100% of its investible assets in equities. The remainder of scheme investments accounting for between 0% to 20% of the portfolio can be made in money market instruments and cash.

The equity portion of the portfolio of this scheme will mirror the stocks featured on the Nifty 500 Momentum 50 Index. Below are the top 5 stocks and their weight on the index as of 31st July 2024:

As you can see, the top 5 stocks featured on the index have an individual weight of around 5% each and account for just over 25% of the overall weight of the index. This indicates that the remaining 45 stocks on the index account for the remainder. This relatively low degree of reliance on the performance of any specific stock would decrease the overall concentration risk for the investors.

You might also have noticed that the above 5 stocks belong to various sectors which can provide a high level of diversification to the investors. Let’s take a closer look at some of the key sectors featured on the Nifty 500 Momentum 50 Index and their weight as of 31 July 2024:

From the above, you can see that this index’s exposure to potentially high-growth sectors such as capital goods, financial services, and automobile & automobile components is high.

However, a substantial portion of the investor’s money will also be invested in other key sectors such as power and consumer services. Diversification across multiple sectors in this manner would help reduce the overall portfolio risk for the investors.

https://www.niftyindices.com/Factsheet/FactsheetNifty500Momentum50.pdf

Top Reasons to Invest in the Max Life Nifty 500 Momentum 50 Fund

Some of the key reasons why an investor should consider investing in the Max Life Nifty 500 Momentum 50 Fund include:

• Equity market-linked returns that have high potential of beating inflation in the long term
• Diversification of investments through flexicap approach of stock selection
• No fund manager bias due to passive management
• Benefit of momentum investing strategy baked into the stock selection approach
• Life cover included with ULIP investment in the fund for enhanced protection

Snapshot of the Max Life Nifty 500 Momentum 50 Fund

Risk Profile – Very High

Benchmark – Nifty 500 Momentum 50 Index

Fund Objective – The fund will invest in a basket of stocks drawn from the constituents of NSE NIFTY 500 Momentum 50 Index that invests in 50 stocks across small cap, mid cap and large cap segment, featuring highest normalized momentum scores within the top 500 stocks by average free-float market capitalization. The objective of the fund is to invest in companies with similar weights as in the index and generate returns as closely as possible, subject to tracking error.

NFO Period with NAV of Rs. 10: 16 August 2024 to 1st September 2024.

Key Investment Risks to Consider

Some of the key risks to consider if one is planning to invest in the Max Life Nifty 500 Momentum 50 Fund include:

• Since momentum strategy depends on historic price changes, there may be a lag before the index adapts to changing market conditions. This may lead to deeper as well as longer drawdowns.
• During periods of higher volatility such as uncertain economic/business environments, momentum stocks have the potential to show sharper underperformance
• The potential for crowding/high correlation among momentum stocks can increase the overall portfolio volatility and risk for the investment.

Other Index Funds from Max Life to Diversify Your Portfolio

Apart from the recently launched Max Life Nifty 500 Momentum 50 Fund, Max Life Insurance currently offers 3 other index funds that existing and new ULIP investors can opt for. Let’s take a closer look at these.

1. Max Life Smallcap Quality Index Fund

The Max Life Smallcap Quality Index Fund was the first index fund launched by Max Life Insurance in August 2023. This scheme primarily tracks the Nifty Smallcap 250 Quality 50 Index which comprises a basket of 50 small cap stocks drawn from the Nifty Smallcap 250 Index and featuring the with the highest quality scores.

Below is a comparison of the performance of the Nifty Smallcap 250 Quality 50 Index versus the broad-based Nifty Smallcap 250 over different periods as of 31 July 2024:

Note: The above returns are index returns and may not be indicative of the future performance of the Max Life Nifty Smallcap Quality Index Fund.

As you can see the strategy index has historically outperformed the parent index over the 10- year long-term investment period. This is further illustrated by the below chart that compares the performance of these two indices over a 10 year period (31 July 2014 to 31 July 2024):

2. Max Life Midcap Momentum Fund

The Max Life Midcap Momentum Index Fund was launched in January 2024 and it was the first index fund from Max Life Insurance that tracks a momentum index. Unlike the new scheme, Max Life Nifty 500 Momentum 50 Fund,which offers flexicap stock exposure, the Max Life Midcap Momentum Index Fund focuses exclusively on midcap stock investments.

This is because the Max Life Midcap Momentum Index Fund tracks the Nifty Midcap 150 Momentum 50 Index so it incorporates the benefits from potentially high returns offered by midcap stocks along with a momentum investment strategy into a single solution.

Below is a comparison of the returns of the Nifty Midcap 150 Momentum 50 Index to the broad-based Nifty Midcap 150 Index as of 31 July 2024:

Note: The above returns are index returns and may not be indicative of the future performance of the Max Life Nifty Midcap Momentum Index Fund.

As you can see from the above table, the strategy index Nifty Midcap 150 Momentum 50 has outperformed the parent Nifty Midcap 150 Index over various periods. This is further illustrated when we compare the performance of these 2 indices over 10 years (31 July 2014 to 31 July 2024) as shown below:

3. Max Life Nifty Alpha 50 Fund

The Max Life Nifty Alpha 50 Fund is a relatively recent addition to the index funds offered by Max Life and this fund was launched in May 2024. This index fund tracks the Nifty Alpha 50 Index which comprises a basket of 50 NSE-listed stocks selectedbased on their high Jensen’s Alpha score. Like the newly launched Max Life Nifty 500 Momentum 50 Fund, this fund also allows flexicap stock exposure to investors.

The below table summarizes the short, medium, and long-term performance of the Nifty Alpha 50 Index versus the broad-based Nifty 50 Index as of 31 July 2024:

Note: The above returns are index returns and may not be indicative of the future performance of the Max Life Nifty Alpha 50 Fund.

The outperformance of the Nifty Alpha 50 Index compared to the popular Nifty 50 Index is also illustrated by the below chart that comparesthe performance of these indices over10 years (31 July 2014 to 31 July 2024):

Note:1-year returns data in the above tables is based on absolute returns, while 3 years, 5 years, and 10years returns data is based on CAGR returns.The past performance of an index does not guarantee future returns.

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