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What is a Momentum Fund?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 14 June 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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Sometimes referred to as momo funds, momentum funds are a type of investment funds that focus on choosing investments based on current market trends. Typically, the investments that are considered appropriate for a momentum fund exhibit some sort of forward movement in terms of earnings or price per share. The administrator or manager of the fund will evaluate the trends associated with various securities, determine which of those securities meets the criteria for inclusion in the fund, then initiate trades accordingly.

The management of a momentum fund is not just about finding the right investments, then allowing them to ride. In order to maximize the return, the fund manager will also keep close watch on the developing trend, looking for indications that the movement is about to peak. By accurately predicting when a given security is about to lose its forward movement or momentum, it is possible to sell just as the security peaks, and thus avoid any type of loss at all.

There are two core factors that go into determining if a given security is right for a momentum fund. One has to do with the financial performance of the issuer of the security. For example, if a business posts consistent gains in earnings over three or four earnings periods, this may indicate the beginning of a trend that can be quite lucrative for investors.

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Another important factor has to do with the movement of the unit price of the security. Should the manager determine that market conditions as well as upcoming events will prompt an upward movement in the price of the security, even for a short period, that security may be deemed worthy of inclusion in the momentum fund. Here, the strategy will be to buy while the security is still somewhat low, ride the trend until just before the price levels off, and sell just as the price peaks.

While going with a momentum fund approach does work for many investors, it is important to remember that successfully earning a return with this investment strategy involves careful monitoring of the marketplace and any factors that may impact the earning capacity of the security’s issuer. For investors who are interested in stable long-term investments that require less attention, this approach can be more trouble than it is worth. Investors who are looking for ways to make money quickly, and have an eye for spotting positive trends, are more likely to find this approach an effective means of increasing the value of their stock portfolios.

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