Active Momentum Funds Vs Growth Funds: Which Delivers Better Returns?

The Indian market has moved through varied phases in recent years. Different themes have led at different times, and certain factor-based indices have at times outperformed some traditional active equity styles. These shifts show that choosing between momentum funds and growth funds is less about identifying a strategy that may consistently outperform and more about understanding which approach may be suitable based on market conditions, personal risk tolerance, and the costs you are prepared for. With this context, here is a structured review of both approaches.

Table of contents

• Growth investing explained
• Advantages and risks of growth investing
• Momentum investing explained
• Advantages and risks of momentum investing
• Growth vs. momentum: Differences and where they overlap
• Deciding which strategy is right for you

Growth investing explained

Growth investing is a strategy that involves investing in companies that are believed to have strong potential to grow faster than the broader market over time. It focuses on companies that investors believe have the potential to expand their earnings, cash flows, or market presence over time. This approach usually emphasises revenue momentum, margin expansion, and the company’s ability to reinvest at relatively high rates of return. The idea is to invest in businesses where the underlying fundamentals may potentially support long-term growth (subject to market risks) even though valuations may appear relatively elevated.

Read Also: Momentum Investment: Strategy, Risks and Return Potential

Advantages and risks of growth investing

Growth investing may be suitable for investors who are comfortable with periods of volatility in exchange for potential long-term capital appreciation. However, the approach carries potential risks, including valuation compression (a decrease in how much investors are willing to pay for a company's earnings) if earnings growth slows or if market expectations become elevated. Moreover, elevated valuations may also translate to increased downside risk during market corrections. Concentration in some segments may also result in phases of underperformance when broader conditions shift. Investors may need to be prepared for extended periods of divergence from broader indices.

Momentum investing explained

Momentum investing follows a systematic process of identifying securities that have shown relatively strong price performance over a recent period. Many frameworks use 6–12 month return data (with short-term periods excluded) and combine these signals with filters related to volatility or liquidity. These portfolios are rebalanced at predefined intervals. Active momentum funds may modify lookback periods, apply sector caps, or use rules designed to manage drawdowns, but all such strategies still rely on past price behaviour rather than forecasting earnings.

Advantages and risks of momentum investing

Momentum strategies may adapt comparatively quickly when market leadership changes. This may help portfolios participate in sectors that gain strength due to policy shifts, sentiment changes, or earnings cycles. However, momentum investing involves meaningful risks. Sharp reversals may lead to short-term drawdowns, and higher turnover typically results in greater realised gains and trading costs. The approach may also be sensitive to event-driven volatility. As with any fund with equity exposure above 65 percent, momentum funds fall under the very high-risk category.

Growth vs. momentum: Differences and where they overlap

Growth investing focuses on assessing long-term business fundamentals, while momentum prioritises recent price behaviour. Both approaches may occasionally converge when fundamentally strong companies also show relative price strength.

They differ mainly in holding duration and their response to short-term volatility. Growth strategies may continue holding through temporary market noise if underlying business indicators remain supportive, while momentum strategies adjust positions more frequently based on rule-driven relative strength signals. Momentum portfolios may rotate across sectors more frequently, whereas growth portfolios may remain tilted towards longer-term structural themes.

Read Also: Value Investing vs Momentum Investing: Key Differences

Deciding which strategy is right for you

Investors who prefer a relatively longer holding period (5-7 years or more) and fundamental-led analysis may find growth strategies more suitable. Investors who prefer a rules-based framework that responds to market trends may consider momentum strategies, acknowledging that they involve higher turnover and greater sensitivity to short-term market moves. For both styles, it is important to review the fund’s stated framework, rebalancing frequency, expense ratio, and risk controls.

Conclusion

Both momentum and growth approaches have historically performed differently under different market conditions. Their future behaviour cannot be predicted, and each style involves specific risks – momentum strategies may face higher volatility during market reversals, while growth strategies may underperform during economic downturns or when interest rates rise significantly.

Rather than attempting to select what they believe may potentially be the consistent outperformer, investors may benefit from choosing an approach they are comfortable staying invested in over time, considering risk tolerance, holding-period preference, and tax implications.

Past performance may or may not be sustained in future.

FAQs

What key metrics do growth investors look at?

They typically evaluate revenue and earnings growth rates, margin trends, free cash flow generation, reinvestment levels, return on invested capital relative to cost of capital, and broader business fundamentals such as customer retention, distribution strength, or intellectual property. These metrics help assess the potential for long-term business expansion, though none provide certainty of future outcomes.

What tools or indicators do momentum investors use?

Momentum strategies generally rely on recent return measures, relative-strength rankings, trend filters such as moving averages, volatility screens, and predefined rebalancing schedules. Some active funds apply sector caps or rules to manage drawdowns. These tools serve as systematic inputs and do not guarantee future performance.

What are the advantages of growth investing?

Growth investing may offer long-term potential for wealth creation if underlying companies continue to expand earnings over time. The approach often features relatively lower portfolio turnover, which may reduce the frequency of realised gains in certain periods. It may also offer investors a more fundamental narrative that assists in understanding long-term expectations, though this does not ensure outcomes.

What are the risks associated with growth investing?

Key risks include valuation compression if actual performance falls short of expectations, periods of underperformance when market conditions favour other segments, and the possibility of business-specific setbacks such as regulatory changes, missed product launches, or weaker-than-expected demand. These risks apply to all categories with high equity allocation.

What are the advantages of momentum investing?

Momentum strategies may help portfolios capture ongoing trends without requiring subjective predictions. They apply rule-based processes that adjust to changing market leadership. However, these tendencies are based on historical observations and may not persist, and the approach carries notable risks linked to reversals and higher turnover.