Investing with a focus on the quality factor involves identifying companies demonstrating strong financial health, sustainable competitive advantages and consistent earnings growth. Quality and value are two of the oldest and most widely recognized factors in investing. The quality factor, in particular, has historically performed well in the Indian stock market, benefiting from the country's unique economic conditions and market structure. Here's why quality as a factor tends to deliver reasonable returns:
Resilience during volatility
India's stock market often experiences higher volatility compared to developed markets. Quality companies with strong balance sheets tend to outperform in periods of volatility—during Covid in Q1 of 2020, sectors such as healthcare, IT and FMCG, known for quality firms, far outperformed the market, and the alpha in the three-month period was in the 5-20% range. The volatility of the sectors was also much lower than that of the market.
Long-term consistent growth over speculation
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