Momentum investing has become one of the most talked-about factor strategies in India. The headline numbers are attractive — Nifty 200 Momentum 30 backtests often show 14–15% CAGR, and AMC momentum funds have seen rapid AUM growth. But a 19-year NSE backtest raises an uncomfortable question: is the momentum premium real, or is it simply a reward for holding illiquid stocks?
About the author: T. Desai runs BacktestIndia.com – a free NSE backtesting platform covering 19 years of data, including delisted stocks.
Disclaimer: This is a hypothetical historical backtest for educational purposes only. Past performance does not predict future results. This is not investment advice. Consult a SEBI-registered Investment Adviser before making any investment decisions.
This analysis was conducted on BacktestIndia.com, a backtesting platform covering 19 years of data, including delisted stocks, with free basic access and premium options for full parameter customisation.
The Study
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I split the Nifty 200 Momentum 30 universe by Scaled Turnover — defined as daily trading turnover ( Number of shares traded * Price) divided by market capitalisation. This captures how actively a stock is traded relative to its size, which is a more accurate liquidity measure than market cap alone.
The top 30 momentum stocks (by 12-month returns) were divided into two equal groups of 15 — high Scaled Turnover (most liquid) and low Scaled Turnover (least liquid) — and backtested over 18.5 years (December 2006 to June 2025) with annual rebalancing, equal weighting, and realistic costs including brokerage, slippage, LTCG (12.5%), and STCG (20%).
The Results
Low Scaled Turnover Momentum: 19.43% Net CAGR | Max Drawdown -66.41%
Base Momentum 30: 14.60% Net CAGR | Max Drawdown -70.61%
Nifty 50 Benchmark: 10.41% Net CAGR | Max Drawdown -55.12%
High Scaled Turnover Momentum: 8.51% Net CAGR | Max Drawdown -75.09%
High-turnover momentum stocks — the liquid ones large funds predominantly hold — returned just 8.51% net CAGR over 19 years, nearly 2% below a plain Nifty 50 index fund, with a -75% maximum drawdown that took over 8 years to recover from. All the alpha lived in the illiquid half: 19.43% net CAGR, 97% positive 3-year rolling periods, and a worst 3-year CAGR of just -8.9%.
What This Suggests
If momentum were a true behavioural premium — driven by investor underreaction and herding — it should work regardless of liquidity. The fact that the premium entirely disappears in liquid stocks suggests it is not a momentum premium at all. It looks more like an illiquidity premium — compensation for bearing the risk of holding lightly-traded, under-researched stocks.
This has a direct implication for momentum fund investors: as a fund’s AUM grows, it is forced to concentrate in high-Scaled-Turnover stocks to deploy capital — exactly where the data shows the alpha vanishes. Individual investors with smaller portfolios retain a structural advantage that large funds cannot replicate.
The full methodology is documented here: Nifty 200 Momentum 30 Index: 19-Year NSE Backtest Reveals the Alpha Is a Liquidity Premium.
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