Imagine you’re building a racing car. Speed is crucial, but without strong brakes and a well-balanced chassis, the fastest car can spin out of control at the slightest curve. Momentum investing is like the powerful engine— it seeks growth by identifying stocks that have shown strength in the past. But even the best-performing stocks go through rough patches. That’s where gold comes in, acting like a stabilizing force, absorbing shocks when markets turn volatile. Together, they create a strategy that’s not just about speed but also about control—allowing investors to stay in the race for the long run without crashing during downturns. Over the past few years, investors have faced extreme market conditions—sharp rallies, deep corrections, and economic uncertainties. Traditional equity investing, particularly broad-based indices like the Nifty 500, has delivered better long-term returns, but with significant volatility. Momentum investing, through the Nifty 500 Momentum 50 index, has consistently performed well in bull market, yet it remains susceptible to deep drawdowns during trend reversals.
This blog explores how blending gold with momentum investing can enhance portfolio resilience and potentially provide a smoother investment experience over time through market cycles.
Why Momentum? The Science Behind Outperformance
Momentum investing is based on a simple yet powerful premise: stocks that have performed well in the past tend to continue their trajectory. This effect, backed by decades of academic research, is driven by investor behaviour, earnings growth persistence, and market inefficiencies.
The Nifty 500 Momentum 50 index systematically selects stocks based on their price strength adjusted to volatility, ensuring that only the best-performing companies make it into the portfolio.
Gold: The Strategic Hedge Against Uncertainty
Gold has long been recognized as a store of value and a hedge against inflation, currency depreciation, and global economic crises. For Indian investors, its importance is even more pronounced, given the rupee’s tendency to depreciate against the US dollar during market downturns.
By integrating gold into an equity portfolio, investors can reduce drawdowns during periods of financial distress. The Gold + Momentum 50 strategy seeks to leverages this dynamic, offering a potential balance between stability and growth.
Rolling and Annualized Returns: Long-Term Performance Insights
The long-term success of the Gold + Momentum 50 strategy becomes evident when analysing rolling and annualized returns. Over time, the strategy has consistently outperformed the Nifty 500 index while providing better downside protection.
For instance, as per past performance data:
• The Nifty 500 index delivered 1-year, 5-year & 10-year annualized returns of 5.95%,23.64% and 13.82% respectively.
• A hypothetical portfolio with a 50:50 allocation to Nifty 500 Momentum 50 and Gold generated corresponding returns of 10.90%, 23.93%, and 17.46% respectively.
While the difference may seem marginal, the impact on risk-adjusted returns is significant. The addition of gold has historically helped not only smooth returns but also reduces drawdowns, potentially making the investment journey more stable and less stressful for investors. Furthermore, rolling returns analysis highlights that the momentum 50 + Gold (50:50) approach maintains consistent performance over time, avoiding extreme volatility spikes that are common in pure equity strategies. As you can see in below chart at a long-term horizon of around 5 years the nifty 500 has delivered around 13.28% return on a median term while the Nifty 500 momentum 50 + Gold (50:50) has been around 16.80% which shows how consistent the strategy has been in the long run. This ability to deliver steady returns while mitigating risks makes it a highly effective approach for long-term wealth creation.
One of the most critical metrics for evaluating an investment strategy is the risk-adjusted ratio, which measures risk-adjusted returns. The Gold + Nifty 500 Momentum 50 strategy has historically delivers a higher risk-adjusted returns compared to standalone equity indices. This means that investors are not just earning higher returns but are also taking on less risk per unit of return.
Data from historical performance suggests that adding gold to a momentum-based equity strategy reduces volatility and has historically smoothed. Investors following this strategy have, in past experienced lower maximum drawdown, which may have contributed to more comfortable investing experience while still participating in market upswings.
Managing Drawdowns: A Critical Risk-Reduction Factor
One of the most significant advantages of the Gold + Nifty 500 Momentum 50 strategy is its historical tendency to mitigate drawdowns, a crucial factor in protecting long-term wealth. Historically, the Nifty 500 has faced a maximum drawdown of -63.71%. In contrast, the Gold + Nifty 500 Momentum 50 strategy has significantly reduced downside risk, with a maximum drawdown of just -32.58%. This suggests that diversification within the strategy has historically played a role in stabilizing returns during periods of market uncertainty, potentially helping investors experience smaller fluctuations and recover more steadily. By helping to limit extreme declines, this approach may enable investors to stay invested with greater confidence, ultimately supporting long-term wealth accumulation.
Correlation Between Momentum 50 and Gold: A Natural Diversifier
The correlation between Momentum 50 and Gold has exhibited cyclical variations over time, often turning negative during periods of market uncertainty. Historically, when equity markets have faced downturns, gold has sometimes shown a tendency to rise or remain stable, highlighting its role as a natural diversifier. The chart demonstrates that during bullish equity cycles, correlation tends to inch towards positive territory, indicating that gold and momentum stocks can occasionally move in tandem. However, during major drawdowns or economic downturns, correlation has turned negative at times, suggesting potential diversification benefits.
It is important to note that correlation patterns can change over time, and past trends may not necessarily sustain in the future. Investors should consider multiple factors when making portfolio allocation decisions.
Conclusion
While short-term market fluctuations can create uncertainty, long-term investing is about identifying strategies that consistently generate wealth. The Gold + Momentum 50 strategy has historically outperformed the Nifty 500 index, proving its resilience and adaptability in different economic conditions.
As global markets continue to evolve, strategies that balance risk and return may become increasingly important. The Gold + Momentum 50 strategy provides investors with the tools to build a resilient portfolio that may thrives in various market conditions, making it a smart choice for those looking to achieve sustainable financial growth.
Disclaimer: This article has been issued on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this document is for general purposes only and not a complete disclosure of every material fact. The Sector mentioned herein is for explaining the concept and shall not be construed as an investment advice to any party. The information / data herein alone is not sufficient and shouldn’t be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. All opinions, figures, estimates and data included in this article are as on date. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on our current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Equity investments are subject to market fluctuations and may carry higher risks. Gold prices are influenced by various factors, including global economic conditions and currency fluctuations. Investors should assess their risk appetite and investment objectives before making any investment decisions. This content is for informational purposes only and does not constitute financial advice or a recommendation to invest in any particular asset class. Readers shall be fully responsible/liable for any decision taken on the basis of this article.
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