Quality Investing Can Help You Stay the Course

Author: Rakesh Paliwal, Mutual Fund Distributor

Since the last quarter of 2024, investing in Indian equity markets has been a journey of significant ups and downs. Stretched market valuations, slowdown in GDP growth, weak corporate earnings, foreign capital outflows and the looming threat of US tariffs have contributed to heightened market volatility.

Although markets have recovered some of the losses off late, the outlook remains uncertain and further stock market volatility cannot be ruled out. While equity investors should ideally have a long-term perspective, sharp stock market swings and market losses can be unsettling for most of us. They can trigger emotional responses such as fear, anxiety or the urge to do something to limit the losses. This often leads to panic-selling, exiting the market entirely or chasing short-term gains in riskier investments. These actions are usually counterproductive and can hinder long-term investment goals. But these tendencies are hard to avoid as they are a result of behavioural biases such as Recency bias and Herd behaviour which constitute focussing too much on recent negative events or following others into or out of markets without analysis, respectively.

Holding a high-quality equity portfolio can help calm those nerves, provide the much-needed portfolio stability and in turn support long-term wealth creation.

In equity investing, ‘high-quality’ generally refers to businesses with robust financial fundamentals. These businesses have strong balance sheets with low levels of leverage. They have high return on capital employed, stable growth and consistent profit margins. Their capital allocation decisions related to reinvestment of profits or mergers and acquisitions are sensible and well executed. They also usually tend to have competitive advantage related to brand, technology, product innovation, distribution networks etc. These businesses have strong corporate governance practices, healthy cash flows and resilient business models which make them better equipped to weather adverse market conditions and deliver consistent returns. However, even with quality companies, it’s important for investors to remain mindful of valuations, as overpaying can diminish long-term returns.

In the bear market of 2010-11, the Nifty 200 Quality 30 Total Return Index, which includes top 30 companies from its parent Nifty 200 index selected based on their ‘quality’ scores, fell by 5 per cent compared to the Nifty 200 Total Return Index’s 23 per cent decline. The Quality index was up 3 per cent in the 2013 market correction when broader markets yielded losses of 12 per cent. Similarly, in the market decline leading up to March 2020, the Quality index limited downside to 24 per cent compared to Nifty 200 Total Return Index’s 34 per cent downfall. Investing in the Quality theme was thus financially as well as psychologically beneficial for investors as their portfolios didn’t see as sharp drawdowns as other equity investors.

High-quality equity portfolios which align well with the saying – ‘when the going gets tough, the tough get going’, are suitable for investors who prefer lower risk and more predictable returns. Retired individuals or those focussed on capital preservation can also benefit from this style of investing. First-time or inexperienced equity investors can also consider Quality investing as a high-quality portfolio would make them less likely to panic during market downturns and stay the course.

In a world marked by macroeconomic and geopolitical uncertainty, investing in high-quality, resilient businesses can provide a rare sense of certainty, offering both a potential source of solid returns as well as peace of mind. Investors who don’t have the time or expertise to analyse and identify such businesses themselves can consider the mutual fund route to invest in the quality theme.

“This article is part of sponsored content programme.”

Published on May 13, 2025