A Look at the Momentum Fund

Investing in a momentum fund can provide you with several benefits. Here are the basics of the momentum fund and what to consider before investing in one.

The Momentum Fund

A momentum fund is a mutual fund that looks to capitalize on a trend. They believe in the old adage that says "the trend is your friend." These types of funds will do a great deal of research in order to uncover stocks and sectors that tend to illustrate a certain amount of growth. Once they identify momentum in the market, they will purchase securities in the direction of the trend and then stay with it until the trend is over. In this way, they can take advantage of the movements in the market and provide growth for their investors.

History

Investing in momentum funds was extremely popular in the 1990s. During this time, the dot-com era was in full swing. Therefore, there were a number of companies that were in the middle of astounding growth. As a result of this growth, momentum funds took over. They became very commonplace with mutual fund companies. After the dot-com bubble burst, these funds kind of lost their momentum. From that point on, they have had a steady following but leveled off a bit as far as attracting new investors. Today, they remain one of many mutual fund options in the market.

What They Look for

Fund managers of momentum funds look for a few key things when they are selecting their investments. In identifying a trend, a lot of number crunching takes place. They will try to look at the numbers that companies post and see if anything is out of the ordinary. They look for companies that post astounding gains or profits as well as very high sales. When a company reproduces this in consecutive quarters, this could be the start of a trend for the company. Fund managers of momentum funds will also look for these gains in entire sectors of the market. The main idea behind these funds is that they look for companies that beat their projected earnings. They believe that if they beat the projections in consecutive quarters, there is no reason to believe that they cannot do it again.

Investment Considerations

With momentum funds, you do have a nice potential to realize gains in your portfolio. However, the execution of the idea behind this is the most important part. Therefore, some momentum funds are better than others. Before you choose a momentum fund, you should still do your fair share of research to make sure that it looks like a good investment. Just because a fund claims to be a momentum fund does not mean that it will post better results than any other type of mutual fund. This is just a strategy that these funds employ.

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