ICICI Prudential MF’s new Quality Fund promises downside protection — is it your next smart bet?

ICICI Prudential Mutual Fund has introduced the ICICI Prudential Quality Fund, an open-ended equity scheme focused on the Quality Factor. The scheme's New Fund Offer (NFO) began on May 6 and is scheduled to end on May 20. The fund will be compared to the Nifty 200 Quality 30 TRI index and will be overseen by Ihab Dalwai and Masoomi Jhurmarvala.

Quality funds typically exhibit lower volatility and provide downside protection, making them more resilient in bear markets thanks to the steady earnings of the high-quality companies they invest in. These funds prioritize companies with high return on equity (RoE), low debt-to-equity ratio, and consistent earnings growth.

Over the last two decades (April 2005 to March 2025), the Nifty 200 Quality 30 Total Return Index (TRI) delivered an annual compounded return of 18%, outperforming the Nifty 200 TRI, which posted a 14.4% return during the same period.

What is a Quality Fund?

Quality funds tend to be less volatile and offer downside protection and often perform better in a bear market due to the stable earnings. These funds invest in high-quality companies  with high return on equity (RoE), low debt-to-equity ratio, and consistent earnings growth.

Over the past twenty years, from April 2005 to March 2025, the Nifty 200 Quality 30 TRI delivered a compounded annual return of 18 per cent, compared to a 14.4 per cent return for the Nifty 200 TRI. 

Ihab Dalwai, Senior Fund Manager at ICICI Prudential Mutual Fund, spoke to Business Today on thematic funds like quality funds and their performance.

How do quality-focused funds operate, and what criteria do they use to select stocks?

Quality-focused funds operate by systematically identifying companies that exhibit strong and sustainable financial characteristics. The ICICI Prudential Quality Fund, for example, follows a three-step selection process. First, it applies a quality filter, looking for companies with high return on equity (ROE), return on invested capital (ROIC), financial leverage, a net cash position, and effective capital allocation strategies. Second, these companies tend to have barriers to entry ,such as a strong brand image, large customer base, product or service excellence, sustainable profitability, and reinvestment potential. Third, even if a company meets these stringent quality standards, investment decisions are only made if the stock is available at a reasonable valuation. This reflects the fund’s principle - quality at a reasonable price. Furthermore, the fund adopts a flexible investment strategy that allows the fund manager to invest across different sectors and market capitalisations, by employing a blend of both top-down and bottom-up approaches.

What are the key advantages of investing in quality funds?

Companies which form a part of the quality portfolio are those with strong fundamentals and sound balance sheets. As a result, they tend to be more resilient during periods of economic uncertainty. Historically, quality funds have delivered higher returns with lower volatility compared to broader market indices, offering superior risk-adjusted returns. For example: Over the last two decades (April 2005 to March 2025), Nifty 200 Quality 30 TRI has delivered a CAGR of 18% as compared to a 14.4% CAGR of Nifty 200 TRI. Quality companies have also shown an ability to limit downside risks during corrections, protecting investors' capital more effectively than many other investment styles. This was visible in the recent bear phase of the market spanning October 2021 to June 2022.

Given their strong historical performance, is now a good time to invest in quality funds?

Over the last five years, quality names have underperformed compared to the broader markets as a result of which many of the quality companies today are available at a reasonable valuation. Given the backdrop of global economies grappling with issues like geopolitical tensions, high debt burdens, and economic slowdowns, companies with strong fundamentals and sustainable earnings are better positioned to withstand volatility and continue growing. Furthermore, with the domestic business cycle gradually normalizing after the post pandemic boom, the environment seems to be conducive for quality companies to deliver superior performance.

What type of investors are best suited for quality-focused investment strategies?

Quality fund can be considered by investors who are seeking to invest in quality companies with strong fundamentals such that even during market downturns, there is a reasonable element of downside protection while maintaining the potential for steady capital appreciation over time.

What additional dos and don'ts should investors keep in mind when considering quality funds?

When considering a quality fund, a prospective investor has to understand how the fund manager is approaching quality - is it quality at any valuation or is it quality at a reasonable valuation. At ICICI Prudential, investments are made at reasonable valuations, reinforcing the principle of buying quality at a reasonable price. Another aspect an investor should be mindful about is that each style of investing will have its own phases of outperformance or under performance. Staying invested through these fluctuations can lead to a good investment experience over the long term.

Key highlights for the ICICI Prudential Quality Fund

Investment Strategy: Follows a flexible approach, blending top-down (macro/sectoral) and bottom-up (company-specific) research.

Stock Selection: Screens 625 companies to shortlist 40–60 stocks based on quality and valuation filters.

Quality Focus: Targets companies with:

High Return on Equity (ROE)

Strong cash flows

Low financial leverage

Proven capital allocation track record

Valuation Discipline: Prudent valuation plays a central role in stock selection.

Exit Load: 1% if redeemed within 12 months

Nil thereafter

Plan Options: Available in Regular and Direct plans with Growth and IDCW (Income Distribution cum Capital Withdrawal) options.