In the ever-evolving landscape of investing, one strategy that has stood the test of time is Quality Investing. This approach focuses on identifying companies with strong fundamentals, sustainable competitive advantages, and the ability to generate consistent returns over the long term. For Indian investors, mutual funds offer a convenient and effective way to practice quality investing without the need for extensive research or stock-picking expertise. In this blog, we’ll explore how you can harness the power of mutual funds to build a portfolio grounded in quality investing principles.
What is Quality Investing?
Quality investing is about investing in businesses that exhibit:
- Strong Financial Health: Companies with high return on equity (ROE), low debt-to-equity ratios, and consistent cash flows.
- Competitive Advantage: Firms with a durable moat—be it through brand strength, pricing power, or technological leadership.
- Growth Potential: Businesses that can grow their earnings sustainably over time.
- Management Quality: Companies led by competent and ethical management teams.
In the Indian context, quality investing often translates to investing in sectors like IT, FMCG, pharmaceuticals, and financial services, where companies have demonstrated resilience and growth over the years. THS IS EDITED.
Why Mutual Funds for Quality Investing?
Mutual funds are an ideal vehicle for quality investing in India for several reasons:
- Professional Management: Fund managers have the expertise and resources to identify high-quality companies and build a diversified portfolio.
- Diversification: Mutual funds spread investments across multiple sectors and stocks, reducing the risk associated with individual companies.
- Accessibility: Even with a small investment, you can gain exposure to high-quality companies that may otherwise be out of reach.
- Systematic Approach: Through SIPs (Systematic Investment Plans), you can invest regularly and benefit from rupee-cost averaging.
Prominent Quality Indices
There are three prominent quality indices in the Indian market: the BSE Quality Index, the Nifty 200 Quality 30 TRI, and the Nifty 100 Quality 30 TRI.
What are Quality Indices?
Quality indices are designed to track the performance of companies that exhibit certain “quality” characteristics. These characteristics can include high profitability (e.g., Return on Equity - ROE), low debt levels, stable earnings growth, and efficient capital utilization. By focusing on these factors, quality indices aim to identify companies that are likely to deliver sustainable long-term returns.
A Closer Look at the Indices:
Let’s examine the some key indices:
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BSE Quality Index: The index employs a non-market capitalization weighting scheme, using the divisor methodology used in Asia Index Pvt. Ltd. equity indices. This index selects 30 companies from the BSE LargeMidCap universe based on a “quality score.” This score considers factors like ROE, accruals ratio, and financial leverage. The constituents are weighted by a combination of their quality score and float-adjusted market capitalization. The key here is the broader universe – it’s not limited to just the top 100 companies.
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Nifty 200 Quality 30 TRI: This index picks 30 quality stocks from the Nifty 200 universe. Similar to the Nifty 100 Quality 30 TRI, it uses quality factors like ROE, debt-to-equity ratio, and earnings growth variability. The crucial difference is that it casts its net wider, considering companies beyond the top 100.
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Nifty 100 Quality 30 TRI: This index focuses on the top 30 quality companies within the Nifty 100. It uses similar quality metrics as the Nifty 200 variant, such as ROE, debt levels, and earnings stability. It represents a more concentrated exposure to large-cap quality.
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NIFTY Midcap150 Quality 50 TRI: This index focuses on 50 high-quality companies from the Nifty Midcap 150 index. The Nifty Midcap 150 index represents the top 150 mid-cap companies listed on the NSE by market capitalization. It represents a more concentrated exposure to high-quality mid-cap companies, which typically offer higher growth potential compared to large-cap stocks but come with higher risk.
Other Quality Focused Indices:
- Nifty500 Multicap Momentum Quality 50
- Nifty Smallcap250 Quality 50
- Nifty500 Multicap Momentum Quality 50
- Nifty MidSmallcap400 Momentum Quality 100
- Nifty Smallcap250 Momentum Quality 100
- Nifty Quality Low-Volatility 30
- Nifty Alpha Quality Low-Volatility 30
- Nifty Quality Low-Volatility 30
Comparison of the Indices
| Parameter | BSE Quality Index | Nifty 200 Quality 30 TRI | Nifty100 Quality 30 TRI | Nifty Midcap150 Quality 50 TRI |
| Exchange | BSE | NSE | NSE | NSE |
| Universe | BSE-listed companies | Nifty 200 (large-cap + mid-cap) | Nifty 100 (large-cap) | Nifty Midcap 150 (mid-cap) |
| Number of Stocks | Varies | 30 | 30 | 50 |
| Focus | Quality companies on BSE | Quality companies in Nifty 200 | Quality companies in Nifty 100 | Quality mid-cap companies |
| Risk Profile | Depends on universe | Moderate (mix of large/mid-cap) | Lower (large-cap focus) | Higher (mid-cap focus) |
| Growth Potential | Depends on universe | Moderate to high | Moderate | High |
| Rebalancing Frequency | Periodic (usually semi-annual) | Semi-annually | Semi-annually | Semi-annually |
| TRI (Total Returns Index) | No | Yes | Yes | Yes |
Mutual Fund Schemes with Quality Theme
Schemes tracking Nifty 100 Quality 30 TRI
| Scheme Name | AUM (Crore) | Expense Ratio (%) | Returns |
| | 1 Week | 1 Month | 3 Months | 6 Months | 1 Year | 3 Years |
| Edelweiss Nifty 100 Quality 30 Index | 154.74 | 0.9 | -0.84 | -1.89 | -5.26 | -7.35 | 8.43 | 12.61 |
Schemes tracking Nifty 200 Quality 30 TRI
| Scheme Name | AUM (Crore) | Expense Ratio (%) | Returns |
| | 1 Week | 1 Month | 3 Months | 6 Months | 1 Year | 3 Years |
| UTI Nifty 200 Quality 30 Index Fund | 391 | 1.04 | -1.26 | -3.47 | -7.56 | - | - | - |
| Bandhan Nifty 200 Quality 30 Index Fund | 0 | 0.99 | -1.25 | -3.38 | - | - | - | - |
Schemes tracking Nifty Midcap150 Quality 50 TRI
| Scheme Name | AUM (Crore) | Expense Ratio (%) | Returns |
| | 1 Week | 1 Month | 3 Months | 6 Months | 1 Year |
| UTI Nifty Midcap 150 Quality 50 Index Fund | 244.45 | 0.88 | -1.27 | -5.2 | -9.39 | -9.55 | 8.36 |
| DSP Nifty Midcap 150 Quality 50 Index Fund | 368.36 | 0.86 | -1.27 | -5.18 | -9.39 | -9.6 | 8.18 |
Schemes tracking BSE Quality Index
| Scheme Name | AUM (Crore) | Expense Ratio (%) | Returns |
| | 1 Week | 1 Month | 3 Months | 6 Months | 1 Year |
| Motilal Oswal BSE Quality Index Fund | 39.83 | 1.03 | -1.83 | -5.1 | -8.93 | -16.49 | 2.97 |
| WhiteOak Capital Quality Equity Fund | 0 | 2.35 | | | | | NFO of fund closed in Jan 2025 |
As we can see, most funds tracking quality indices do not have a performance history of more than three years. However, the historical performance of these quality indices is very promising. Refer to the table below for the performance of various quality indices.
Returns of Quality Indices over period
| Benchmark Name | 2025 | 2024 | 2023 | 2022 | 2021 | 2020 | 2019 | 2018 | 2017 | 2016 |
| BSE Quality Index | -5.6 | 15.16 | 30 | 9.59 | 17.23 | 23.09 | 2.13 | -5.91 | 36.94 | 5.01 |
| NIFTY 100 Quality 30 TRI | -1.53 | 11.34 | 32.03 | -0.9 | 22.24 | 22.6 | 5.7 | 4.96 | 23.45 | 2.19 |
| NIFTY 200 Quality 30 TRI | -3.85 | 14.42 | 31.67 | -4.4 | 26.18 | 26.32 | 5.59 | 8.85 | 30.26 | 1.02 |
| NIFTY MIDSMALLCAP400 MOMENTUM QUALITY 100 TRI | -11.16 | 26.25 | 48.97 | -5.36 | 57.76 | 30.55 | 3.21 | -14.92 | 67.39 | 3.69 |
| NIFTY Midcap150 Quality 50 TRI | -8.06 | 20.2 | 28.72 | -8.99 | 38.1 | 27.23 | 4.15 | -7.94 | 54.69 | 10.4 |
| NIFTY SMALLCAP250 MOMENTUM QUALITY 100 TRI | -12.82 | 21.81 | 50.09 | -6.11 | 72.32 | 29.64 | -1.87 | -18.42 | 72.92 | 4.06 |
| NIFTY SMALLCAP250 QUALITY 50 TRI | -13.19 | 27.47 | 52.13 | 0.51 | 66.06 | 33.57 | -7.37 | -15.62 | 45.51 | 7.35 |
| NIFTY500 MULTICAP MOMENTUM QUALITY 50 TRI | -12.43 | 21.44 | 57.89 | -14.17 | 61.79 | 29.71 | 9.06 | -4.32 | 58.83 | -3.86 |
| Nifty Alpha Quality Low Volatility 30 TRI | -5.12 | 19.71 | 39.39 | -4.59 | 26.69 | 25.28 | 3.95 | 3.98 | 35.65 | 6.17 |
| Nifty Quality Low Volatility 30 TRI | -0.87 | 9.03 | 28.24 | 0.3 | 22.96 | 23.91 | 3.16 | 6.32 | 27.25 | -0.64 |
| BSE Sensex | -1.06 | 8.17 | 18.74 | 4.44 | 21.99 | 15.75 | 14.38 | 5.91 | 27.91 | 1.95 |
| NIFTY 50 TRI | -0.94 | 10.09 | 21.3 | 5.69 | 25.59 | 16.14 | 13.48 | 4.64 | 30.27 | 4.39 |
Benefits of Quality Investing Through Mutual Funds
- Long-Term Wealth Creation: Quality companies tend to compound wealth over time, making them ideal for long-term investors.
- Lower Volatility: High-quality stocks are generally less volatile, providing stability to your portfolio during market downturns.
- Inflation-Beating Returns: Quality businesses often have pricing power, allowing them to pass on inflationary costs to consumers and maintain profitability.
- Peace of Mind: Knowing that your investments are in fundamentally strong companies can help you stay committed to your financial goals.
Key Considerations for Investors
- Patience is Key: Quality investing is a long-term strategy. Avoid the temptation to chase short-term gains.
- Avoid Over-Diversification: While diversification is important, spreading your investments too thin can dilute returns. Focus on a few high-quality funds.
- Monitor Performance: Regularly review your mutual fund investments to ensure they continue to align with your goals and the quality investing philosophy.
- Stay Disciplined: Stick to your investment plan, especially during market volatility. Quality companies often outperform in the long run.
Conclusion
Quality investing through mutual funds is a powerful strategy for Indian investors looking to build wealth sustainably. By focusing on funds that invest in high-quality companies, you can benefit from the expertise of professional fund managers, reduce risk through diversification, and achieve your financial goals with confidence.
Wealth managers often advise starting early, investing regularly, and staying committed to quality investing principles. It is essential to remember that achieving financial success is not about timing the market, but about the time you spend in the market. Make wise choices, be patient, and allow the power of compounding to work in your favor.
Happy Investing!
Disclaimer: Mutual fund investments are subject to market risks. Please read the scheme-related documents carefully before investing. Past performance is not indicative of future results. Consult with a financial advisor to tailor investments to your specific needs and risk profile.
