'A staggered investment approach (using SIP or STP) can help investors benefit from this opportunity while reducing timing risk.'
Is the current volatility in the stock market straining your nerves?
Quality-themed funds, which aim to deliver steady long-term returns while limiting downside in turbulent markets, may be worth considering.
Earlier this year, two actively managed quality funds -- ICICI Prudential Quality Fund and White Oak Capital Quality Equity Fund -- were rolled out.
The new fund offer of Axis Nifty500 Quality 50 Index Fund recently opened for subscription.
"In today's environment of macroeconomic uncertainty, investors are seeking investment solutions that offer exposure to companies with durable business models and enduring competitive advantages," says Vikash Wadekar, head - passive business, Axis Mutual Fund.
What sets them apart
High-quality companies typically show durable business strengths -- strong brands, sustainable moats, resilience amid slowdowns, and robust corporate governance.
"The quality factor focuses on companies with strong fundamentals, the ability to generate consistent earnings, and withstand economic stress," says Ramesh Mantri, chief investment officer, WhiteOak Capital Asset Management Company.
"Common selection parameters include high return on equity (RoE), low debt-to-equity ratio, relatively stable earnings growth, and strong free cash flow," adds Mantri.
"They also typically possess sustainable competitive advantages and good governance.".
Such businesses command premium valuations due to their high visibility of future earnings.
Investors can access them through index funds and exchange-traded funds (ETFs) tracking indices such as Nifty100 Quality 30, Nifty500 Quality 50, and Nifty Midcap150 Quality 50, and also via active funds.
Short-term lag, long-term promise
The quality factor has lagged in recent years.
The Nifty 500 Index lost 3.37 per cent in the year ended August 26, 2025, while the Nifty 500 Quality 50 Index fell 8.68 per cent.
However, experts remain optimistic.
"Although quality funds have underperformed over the past year, they remain a suitable investment option for long-term investors as they can offer stability amid market volatility," says Wadekar.
"High-quality companies generally deliver steady earnings across cycles.
"Over the long term, this consistent compounding tends to outpace short-term factor rotations," says Mantri.
Quality funds tend to be less volatile in bear phases.
"The quality focus provides stability to an investor's portfolio, especially during bear markets when such funds tend to be less volatile," says S Sridharan, founder and CEO, Wallet Wealth.
Mantri adds that they display greater resilience during periods of economic uncertainty.
Underperform during bull runs
The quality strategy also has a few drawbacks.
"Quality funds usually underperform during bull markets driven by cyclical or speculative stocks.
"Also, since quality companies often trade at a premium, investors may end up paying high valuations.
"In addition, these funds tend to focus on a narrow set of quality largecap companies, creating concentration risk," says Sridharan.
How to invest
Experts recommend long-term, staggered allocation.
"Invest with a long-term horizon of five years or more.
"A staggered investment approach (using a systematic investment plan or a systematic transfer plan) can help investors benefit from this opportunity while reducing timing risk.
"An allocation of around 10 per cent of the overall portfolio can be considered, provided the overlap with existing holdings does not exceed 20 to 30 per cent," says Sridharan.
He cautions aggressive investors against such funds.
"Very aggressive investors chasing high short-term returns from mid- and small-cap segments may prefer to avoid quality funds, since these typically underperform in speculative market phases," he says.
Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
Feature Presentation: Ashish Narsale/Rediff