Focus on Quality: Invest in resilient businesses amid uncertainty

Economic Times

30-06-2025

Quality investing is gaining traction amid market challenges. The Nifty 200 Quality 30 index offers exposure to financially strong companies. It uses metrics like Returns on Equity and Earnings Growth. Factor-based strategies can improve portfolio returns. Tactical allocation and long-term capital appreciation are key benefits. A rules-based framework and lower costs make it attractive.
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1) Exposure to differentiated drivers of returns
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2) Tactical allocation: Potential risks and Underperformance over last few years indicate probable outperformance going forward
3) Strategic allocation: Long-term capital appreciation with lower risk
4) Rules-based investment framework
5) Lower costs
Conclusion
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com .)
With the backdrop of several global and domestic geopolitical and macroeconomic headwinds facing Indian equity markets , discussions about Quality investing are re-emerging in investment circles. Quality investing constitutes investing in financially strong and steady businesses with are relatively stable during periods of market stress.The Nifty 200 Quality 30 Index includes top 30 companies from the universe of Nifty 200 Index on the basis of 'quality' score. Metrics used to define the Quality score include Returns on Equity, Debt/Equity ratio and Earnings Growth.Here are 5 reasons why one should consider a Nifty 200 Quality 30 index fund to build their Quality exposure:Compared to the Nifty 200, which is a traditional index based on market capitalization of underlying businesses, a factor-based index is built using a differentiated driver of returns – such as Momentum, Low volatility, Value or Quality. Factor-based strategies like a Nifty 200 Quality 30 index fund can complement plain-vanilla indices in an investment portfolio by improving risk-adjusted returns.Indian equity investors have experienced an almost one-way equity rally post the pandemic in 2020. While this has been rewarding, investors now risk becoming complacent. Market fortunes are fundamentally tied to the underlying economic situation, which, as we know, is cyclical i.e. economic upturns are followed by downturns, which are again followed by upturns. Momentum and Value themes have done well during the current upcycle and earnings spurt that we witnessed post-COVID-19. However, now we are in the final stages of that upcycle with signs of normalization becoming evident. As per ICRA , India's GDP growth for financial year 2024-2025 is expected to be 6.3% compared to 9.2% of the previous fiscal. Global factors such as elevated policy uncertainty and heightened trade and geopolitical tensions are also weighing on stock markets. In such an economic environment, the Quality theme that prioritizes investments in resilient, sound businesses with strong balance sheets, are likely to do better than momentum-driven stocks. Given that this style has relatively underperformed over the last few years, high-quality investments are available at reasonable valuations, increasing the probability of outperformance going forward.As of April 2025, the Nifty 200 Quality 30 TRI has generated higher average Rolling Returns over 1-, 5- and 10-years horizons compared to Nifty 200 TRI and Nifty 50 TRI. On a CAGR basis too, the Quality style has outperformed the mainstream indices since April 2025. The Quality theme also offers better downside protection during periods of market stress such as the taper tantrum of 2013, when the Nifty 200 Quality 30 TRI limited downside to 4% compared to Nifty 200 TRI's 14% and Nifty 50 TRI's 13%. Similarly, during the NPA crisis of 2015-16, the Quality-focused index outperformed its plain-vanilla peers by falling only 14% compared to their 20% and 21%.A rules-based strategy like the Nifty 200 Quality 30 index can enable systematic screening of businesses based on fundamentals. This helps avoid emotional decision-making, human biases or errors in times of market euphoria or panic selling.A Nifty 200 Quality 30 index fund uses systematic, rules-based models to identify and invest in stocks. Since there is no need for research or active management, expense ratios of these funds are typically lower.Quality as a factor should ideally be part of an investor's core, long-term oriented portfolio. Given the recent underperformance and as a measure to build resilience in the face of ongoing uncertainty on the global as well as domestic fronts, now is a suitable time to accumulate a Quality basket. Investors can stagger their investments into the Quality space over the next 2-3 years to eventually benefit over the medium to long term.