Momentum Investing India: 18-Year NSE Backtest (2006-2025)

Introduction: The High-Octane Factor

Direct Answer: Yes, momentum investing works in India—but it's not for everyone. Our 18.5-year backtest (December 2006 - June 2025) shows momentum portfolios delivered 14.01% CAGR compared to Nifty 50's 10.42%, but required surviving a catastrophic -70.53% drawdown during the 2008 crisis and enduring volatility 10% higher than the market.

If low volatility investing is the tortoise—steady, defensive, boring—then momentum is the hare: fast, aggressive, and prone to spectacular crashes.

Momentum investing follows a deceptively simple rule: buy stocks that have been rising, sell stocks that have been falling. The strategy bets on trend continuation rather than mean reversion, capitalizing on one of the most persistent anomalies in financial markets.

Why this matters for Indian investors:

• Superior absolute returns: 14.01% CAGR turns ₹50 lakh into ₹5.64 Cr over 18.5 years (vs ₹3.33 Cr for Nifty)
• Tax-aware analysis: We model India's actual LTCG/STCG structure—6-month rebalancing triggers significant STCG (15%) vs LTCG (10%)
• Regime-dependent performance: Crushes it in bull markets (+139% in 2020-21), gets crushed in bear markets (-68% in 2008-09)
• Crisis amplification: Unlike defensive strategies, momentum amplifies market crashes rather than dampening them

Momentum has been documented globally since the 1990s, but does it persist in India's retail-dominated, high-turnover market? Can Indian investors stomach the volatility required to harvest these returns?

Spoiler alert: The returns are real, but the psychological toll is severe.

What is Momentum Investing?

The Academic Foundation

Momentum was first rigorously documented by Jegadeesh and Titman in their seminal 1993 paper "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency." They found that stocks with strong 3-12 month past returns continued outperforming over the next 3-12 months.

This finding has since been replicated across:

• 40+ countries including both developed and emerging markets
• Multiple asset classes (equities, bonds, commodities, currencies)
• 90+ years of US market data
• Various time periods including the Great Depression, World Wars, and modern crises

Unlike many financial anomalies that disappear after publication, momentum has persisted for 30+ years post-discovery, suggesting deep behavioral roots rather than data mining.

Why Momentum Works: Behavioral Explanations

1. Under-Reaction to Information

Investors systematically under-react to new information (earnings surprises, product launches, regulatory changes). Prices adjust slowly rather than instantly, creating exploitable trends. Academic research shows it takes 6-12 months for markets to fully incorporate fundamental news.

2. Herding Behavior

Once a stock starts trending, investors pile in based on "social proof" rather than fundamental analysis. This amplifies price movements beyond what fundamentals justify, extending trends for months or even years.

3. Anchoring Bias

Investors anchor to historical price levels and adjust slowly. A stock at ₹100 that rises to ₹150 is still "cheap" to anchored investors, delaying their buying decisions and allowing the trend to persist.

4. Disposition Effect

Retail investors hold losers too long (hoping to break even) and sell winners too quickly (locking in gains). This creates selling pressure on rising stocks that's absorbed slowly, allowing trends to continue.

The Indian Context

India's market has unique characteristics that may amplify momentum:

• Retail dominance: ~40% of NSE volumes come from retail investors who exhibit stronger behavioral biases
• Information asymmetry: Corporate disclosure gaps create delayed price discovery
• Promoter control: Concentrated ownership can amplify trends as promoters build/reduce stakes
• Sector rotation: India's rapid economic shifts create multi-year sector trends (IT in 2000s, infrastructure in 2005-08, digital in 2020s)

Methodology: How We Tested Momentum in India

Data Source & Quality

Provider: EODHD Financial APIs
Coverage: December 2006 - June 2025 (18.5 years)
Companies: 1,700+ NSE-listed stocks including delisted companies
Data Points: Monthly adjusted prices, market cap, fundamental ratios

Survivorship Bias Mitigation: Our dataset includes companies that were delisted or merged during the period, preventing the upward bias common in backtests that only use current index constituents.

Universe Definition

Market Cap Range: Top 200 stocks by market capitalization (Rank 1-200)
Rationale: Broader than our low volatility analysis (which used Top 100) to capture mid-cap momentum opportunities while maintaining sufficient liquidity.

Quality Filter: PE Ratio > 0 (excludes loss-making companies)

Why Top 200 vs Top 100? Momentum often emerges in smaller, faster-growing companies. Restricting to Top 100 would miss significant mid-cap opportunities. The Top 200 universe balances opportunity with liquidity constraints.

Strategy Construction

Step 1: Calculate Normalized 12-Month Momentum
For each stock, we computed: (Price Return over 12 months) / (12-month price volatility)

This "risk-adjusted momentum" metric prevents overweighting highly volatile stocks that happen to have strong absolute returns but inconsistent trends.

Step 2: Rank and Select
Each rebalancing date:

1. Rank all eligible stocks by normalized momentum (highest to lowest)
2. Select the 30 stocks with highest momentum

Step 3: Portfolio Weighting
Equal weight allocation: Each of the 30 stocks receives 3.33% allocation

Step 4: Rebalancing
Frequency: Semi-annual (every 6 months: June & December)
Rationale: Balances momentum exposure freshness with tax efficiency

Why 6-Month Rebalancing? Academic research shows 6-12 month formation periods capture optimal momentum. Shorter periods (1-3 months) capture short-term reversals rather than true momentum. Longer periods (18+ months) suffer from mean reversion. Six months also provides two rebalances annually, refreshing exposure to new trends while limiting tax drag.

Cost Modeling: The Indian Reality

Transaction Costs: 0.11% per trade
Includes: Brokerage (0.03%), STT (0.025%), Exchange charges (0.00325%), GST (0.0054%), SEBI charges (0.0001%), Stamp duty (0.015%), DP charges (~0.03%)

Slippage: 0.05% per trade
Market impact cost for executing orders in real conditions

Tax Modeling:

• LTCG (Long-Term Capital Gains): 10% tax on gains above ₹1 lakh per year for holdings >1 year
• STCG (Short-Term Capital Gains): 15% tax on gains from holdings <1 year

Critical Difference from Low Volatility: Six-month rebalancing means many positions are sold before reaching the 1-year LTCG threshold, triggering higher STCG tax rates. This creates significant tax drag compared to annual rebalancing strategies.

Results: Higher Returns, Brutal Volatility

Overall Performance (Dec 2006 - Jun 2025)

Return Metrics:

• Gross CAGR: 15.23% vs Nifty's 10.42% = +4.81% annual outperformance
• Net CAGR (after all costs & taxes): 14.01% = +3.59% annual outperformance
• Total Wealth Creation: ₹50 lakh invested in Dec 2006 would have grown to:
  • Momentum Strategy: ₹6.88 Cr (Gross) / ₹5.64 Cr (Net)
  • Nifty 50: ₹3.33 Cr
  • Outperformance: 1.7x wealth creation (net)

Risk Metrics (The Brutal Reality):

• Annual Volatility: 22.85% (Gross) / 22.83% (Net) vs Nifty's 20.78% = 10% MORE volatile than benchmark
• Maximum Drawdown: -70.25% (Gross) / -70.53% (Net) vs Nifty's -55.12% = 28% deeper worst-case loss
• Recovery Time: 68 months (Gross) / 65 months (Net) vs Nifty's 60 months = Slower recovery despite higher returns

What -70.53% Actually Means: A ₹1 Cr portfolio invested in Oct 2007 fell to ₹29.5 lakhs by Dec 2008. You would have watched ₹70.5 lakhs evaporate in 14 months. It took until May 2014 to recover—5.4 years of watching your portfolio underwater. If you couldn't stomach this, momentum investing is not for you.

Performance by Market Regime

Bull Markets:

• 2007 Rally: +86% (Jan-Oct 2007) vs Nifty's +54%. Momentum crushed it.
• 2009-2010 Recovery: +137% (Mar 2009 - Dec 2010) vs Nifty's +89%. Captured the explosive rebound.
• 2020-2021 Post-COVID: +139% (Apr 2020 - Dec 2021) vs Nifty's +94%. Rode the liquidity-driven rally.

Bear Markets (Where It Hurts):

• 2008 Global Financial Crisis: -68% (Jan 2008 - Mar 2009) vs Nifty's -52%. Amplified the crash.
• 2011-2012 Slowdown: -18% vs Nifty's -12%. Moderate underperformance.
• 2020 COVID Crash: -38% (Jan-Mar 2020) vs Nifty's -38%. Matched the benchmark fall.

Sideways/Choppy Markets:

• 2015-2016: +5% vs Nifty's +3%. Slight edge in range-bound conditions.
• 2018: -8% vs Nifty's -5%. Struggled when trends reversed frequently.

Pattern Recognition: Momentum is a pro-cyclical strategy. It amplifies whatever the market is doing—up or down. In strong trends (bull or bear), it outperforms. In choppy, trendless periods, it struggles with whipsaws.

Head-to-Head: Momentum vs Low Volatility

Our platform has analyzed both low volatility and momentum strategies over the identical 18.5-year period using the same rigorous tax-aware methodology. The comparison reveals complementary risk-return profiles.

Correlation Analysis: Do They Diversify?

Pearson Correlation (Monthly Returns): 0.87

Interpretation: Strong positive correlation—the strategies move together ~87% of the time. However, the remaining 13% creates meaningful diversification opportunities:

• Opposite Direction Months: 30 out of 222 months (13.5%) where one was positive while the other was negative
• Bear Market Divergence: 2008 crisis: LV fell -39% vs Momentum's -68% = 29 percentage point protection
• Bull Market Divergence: 2020-21 rally: LV gained +77% vs Momentum's +139% = 62 percentage point opportunity cost

Key Insight: While the strategies are correlated (0.87), they diverge most when it matters—during extreme bull and bear markets. Low volatility provides downside protection when momentum crashes, while momentum captures explosive upside that low volatility misses. This imperfect correlation suggests potential benefits from combining both approaches, though we leave detailed analysis of mixed strategies for future research.

Who Wins When?

Momentum Outperformed in 53.2% of Months (118 out of 222)
Low Volatility Outperformed in 46.8% of Months (104 out of 222)

Momentum's Best Months (vs LV):

• Oct 2007: Momentum +17.4% vs LV +7.2% = +10.2% outperformance
• Jun 2007: Momentum +8.0% vs LV -0.6% = +8.7% outperformance
• Aug 2023: Momentum +2.7% vs LV -5.1% = +7.8% outperformance

Low Volatility's Best Months (vs Momentum):

• Sep 2008: LV -7.1% vs Momentum -18.4% = +11.2% protection
• Oct 2008: LV -19.6% vs Momentum -30.4% = +10.7% protection
• Jan 2025: LV -0.9% vs Momentum -11.1% = +10.2% protection

Pattern: Momentum wins big in explosive rallies. Low volatility wins (or loses less) during crashes and corrections.

The Tax Impact: 6-Month Rebalancing Cost

India's Capital Gains Tax Structure

Unlike most global backtests that ignore taxes, India's LTCG/STCG distinction creates significant drag on active strategies:

STCG (Short-Term): 15% on stocks held <1 year
LTCG (Long-Term): 10% on gains above ₹1 lakh per year for stocks held >1 year

Momentum's Tax Reality

Six-month rebalancing means:

• Positions bought in June are sold in December (6 months) = STCG at 15%
• Positions bought in December are sold in June (6 months) = STCG at 15%
• Only positions that happen to survive multiple rebalances qualify for LTCG

Why the Tax Difference?

1. Rebalancing Frequency: 6-month (momentum) vs 12-month (low volatility) = double the turnover
2. STCG vs LTCG: Most momentum gains taxed at 15% vs low volatility's 10%
3. Higher Absolute Gains: Momentum generates more taxable events despite similar turnover rates

Tax Optimization Consideration: If you're implementing momentum yourself, consider annual rebalancing (every December) instead of semi-annual. This would allow all positions to qualify for LTCG treatment, reducing tax drag from ~1.22% to ~0.5% annually. However, this reduces momentum exposure freshness and may impact gross returns. Our analysis suggests the trade-off is worth it for most investors.

Fundamental Quality Profile

Does momentum just chase "hot" stocks regardless of fundamentals, or does it systematically select quality businesses? Our PE ratio, ROE, and EPS growth analysis reveals surprising patterns.

PE Ratio Analysis: Premium Valuations

The momentum portfolio consistently trades at 10-20x higher PE ratios than the broader universe:

Interpretation:

• Momentum ≠ Value: The strategy systematically selects expensive stocks (high PE) rather than cheap ones
• Growth Premium: Market pays up for stocks with strong price momentum, often linked to earnings growth expectations
• Valuation Risk: Current PE of 54x (as of 2024) suggests potential mean reversion risk if growth disappoints

ROE Analysis: Profitability Volatility

Data Period: December 2006 - March 2024

Unlike low volatility stocks which maintain stable ROE, momentum stocks show significant profitability swings:

Key Insight: Momentum doesn't select for consistently high ROE like quality or low volatility strategies. Instead, it captures stocks during their growth phase—sometimes with improving ROE, sometimes with temporarily depressed profitability that's recovering.

EPS Growth Analysis: Capturing Growth Inflections

Data Period: December 2006 - March 2024

Here's where momentum truly shines—capturing extreme earnings growth periods:

Critical Observation (2009-2010 Spike to 68%):

The momentum portfolio captured the post-GFC earnings recovery explosion—68% EPS growth vs universe's 23%. This is momentum's superpower: identifying and concentrating in companies experiencing earnings inflections before the market fully recognizes them.

Fundamental Story:

1. Momentum ≠ Fundamentals-Blind: Despite the "trend-following" label, momentum systematically selects stocks with superior earnings growth
2. Growth at a Premium: Market pays up (high PE) for stocks showing strong EPS growth trends
3. Volatility Trade-Off: EPS growth is highly volatile (6% to 68% swings) vs low volatility's stable 10-20% bands

Who Should Use Momentum vs Low Volatility?

Use Momentum If You:

• Have 10+ year investment horizon: Need time to recover from -70% drawdowns
• Can stomach extreme volatility: Won't panic-sell when portfolio falls 40-50%
• Want maximum absolute returns: Willing to accept higher risk for higher CAGR
• Are young with high income: Can dollar-cost-average through crashes
• Believe in trend continuation: Comfortable buying "expensive" stocks that keep rising
• Track markets actively: Can rebalance semi-annually with discipline

Use Low Volatility If You:

• Prioritize capital preservation: Can't afford -70% drawdowns
• Want better sleep: Prefer 16% volatility over 22%
• Are near retirement: Need stable, defensive equity exposure
• Seek tax efficiency: Annual rebalancing = LTCG vs momentum's STCG
• Believe in quality: Prefer stable, profitable companies over growth stories
• Want crisis protection: Recover 9x faster than momentum (-44% vs -70%)

The Risk Tolerance Test

Scenario: You invest ₹1 Cr in Oct 2007. By Dec 2008, it's worth ₹29.5 lakhs.

Question 1: Can you hold without selling?
Question 2: Can you buy MORE at the bottom?
Question 3: Can you wait 5.4 years to break even?

If you answered "yes" to all three, you might have the temperament for momentum investing. If you hesitated on even one, stick with low volatility or diversified index funds.

What Could Go Wrong? Limitations & Risks

1. Momentum Crashes Are Catastrophic

The Problem: When momentum reverses, losses are severe and sudden. Unlike gradual mean reversion, momentum crashes happen in weeks.

Historical Evidence:

• Sep-Oct 2008: -42% in 2 months
• Feb-Mar 2020: -32% in 1 month
• Jan 2025: -11% in 1 month

Why It Happens: Crowded trades unwind violently when trends reverse. Everyone rushes for the exit simultaneously.

2. Extended Recovery Periods

Reality Check: Despite 34% higher terminal wealth, momentum took 65 months to recover from peak drawdown vs Nifty's 60 months and low volatility's 7 months.

Psychological Toll: Watching your portfolio underwater for 5+ years tests even the most disciplined investors.

3. Tax Drag from Frequent Rebalancing

The Numbers: ₹64.2 lakhs paid in taxes vs low volatility's ₹25.8 lakhs—2.5x higher despite only 2x rebalancing frequency.

STCG Trap: Six-month holding periods trigger 15% tax vs 10% LTCG, creating 50% higher tax rates on gains.

4. Capacity Constraints at Scale

Liquidity Reality: This backtest assumes ₹50 lakh initial capital. At ₹50+ Cr portfolio size:

• Top 200 stocks have lower average daily volumes than Top 100
• Market impact costs increase materially (1-2% for mid-cap positions)
• Rebalancing execution becomes multi-day process, reducing momentum capture

Sweet Spot: ₹20 lakh - ₹10 Cr. Below this, transaction costs hurt. Above this, liquidity constraints bite.

5. Regime Dependency

Not All Markets Are Equal:

• Strong Trends (2007, 2009-10, 2020-21): Momentum crushes it (+86%, +137%, +139%)
• Choppy Markets (2015-16, 2018): Whipsaws kill returns (-8% in 2018)
• Bear Markets (2008): Amplifies crashes (-68% vs Nifty's -52%)

The Problem: You can't predict which regime is coming. Momentum requires commitment through all conditions.

6. Survivorship Bias (Partially Addressed)

While our dataset includes recently delisted companies, companies that delisted before our data coverage began (pre-2006) are not included. This may have some impact on historical returns, though difficult to quantify precisely.

Key Takeaways: What This Means for Investors

✅ Evidence-Based Conclusions

1. Momentum works in India: +3.59% annual alpha over 18.5 years after all costs and taxes, with 34% higher terminal wealth than Nifty
2. The returns come with brutal risk: -70.53% drawdown, 65-month recovery, 37% higher volatility than low volatility strategies
3. Tax-aware analysis is critical: 6-month rebalancing triggers significant STCG drag (1.22% annually), 2.5x higher tax bill than annual strategies
4. Momentum captures growth inflections: Systematically selects stocks with superior EPS growth (68% spike in 2009 vs universe's 23%)
5. Complementary to low volatility: 0.87 correlation means they move together mostly, but diverge when it matters (bear vs bull markets)
6. Recent performance remains strong: +84% cumulative return (2022-2025) vs low volatility's +46%, suggesting the anomaly persists

⚠️ Important Caveats

1. Not suitable for most retail investors: Requires exceptional risk tolerance, long horizon, and emotional discipline
2. Past crashes will repeat: Expect multiple -40% to -70% drawdowns over any 20-year period
3. Momentum crashes are violent: Unlike gradual corrections, momentum reverses suddenly (weeks, not months)
4. Tax optimization matters: Consider annual rebalancing instead of semi-annual to reduce STCG drag
5. Capacity constraints exist: Works best for ₹20L - ₹10 Cr portfolios; beyond this, liquidity issues emerge

🔄 The Momentum-Low Volatility Spectrum

Think of factor investing as a spectrum:

• Low Volatility: 12.38% CAGR, -44% drawdown, 7-month recovery = Defensive
• ???: Somewhere in between = Balanced
• Momentum: 14.01% CAGR, -70% drawdown, 65-month recovery = Aggressive

The 0.87 correlation suggests these strategies, while highly correlated, offer different risk-return profiles that may complement each other in a diversified portfolio. Investors might consider their personal risk tolerance when positioning along this spectrum.

Frequently Asked Questions

Conclusion: Momentum for the Brave

Over 18.5 years, momentum investing delivered exactly what it promises: higher returns for those who can stomach the volatility.

14.01% CAGR with 1.7x wealth creation vs Nifty. -70.53% drawdown with 5.4-year recovery periods. 37% higher volatility than low volatility strategies. 2.5x higher tax bills.

This isn't a strategy for everyone. It's not a strategy for most people. It's a strategy for disciplined investors with exceptional risk tolerance, long time horizons, and the emotional fortitude to buy when portfolios are down 60%.

The behavioral biases that make momentum work—under-reaction, herding, anchoring—are deeply embedded in human psychology. These patterns have persisted for 90+ years globally and 18+ years in our Indian data. There's no reason to believe they'll disappear.

But knowing momentum works and actually implementing it are entirely different things. Paper returns of 14% mean nothing if you panic-sell at the bottom of a -70% crash.

For brave, disciplined, long-term investors, momentum represents one of the highest-returning systematic strategies in Indian equities. For everyone else, there are safer paths to wealth creation.

Choose wisely. Your risk tolerance matters more than historical returns.

About This Analysis

Data Source: EODHD Financial APIs (December 2006 - June 2025)
Platform: BacktestIndia.com Portfolio Strategy Analyzer
Methodology: Semi-annual rebalancing, equal-weighted, top 200 market cap universe
Compliance: Educational tool under SEBI Investment Advisers Regulations 2013, Regulation 3(1)(d) exemption

Author: Ishani Tapan Desai
Platform: BacktestIndia.com
Published: December 7, 2025
Contact: ishani.desai20@yahoo.com

Copyright: © 2025 Tapan Desai. Government of India Copyright Certificate No. SW-2025021891.

Related Analysis: Compare momentum's aggressive profile with our analysis of low volatility investing in India, which delivers 12.38% CAGR with only -44% drawdowns and 7-month recovery periods—demonstrating complementary risk-return characteristics.