The fund will invest in companies drawn from the fund house’s research universe, consisting of approximately 450 stocks, selected based on a framework of quality factors. This approach focuses on companies with strong foundations, good governance standards and sustainable business models. Stock selection will be guided by quantitative quality measures such as high return on equity, low debt, consistent earnings growth, strong market positioning and clearly visible competitive advantages. ICICI’s other two active quality funds Pru MF and WOC MF have a track record of less than a year and follow similar strategies.
Four bucket strategy
In addition to these qualitative filters, the portfolio construction will be guided by four different share categories.
The first category consists of companies with expanding economic boundaries – companies whose competitive advantages become stronger over time, often driven by network effects or economies of scale.
The second category follows a Quality at Reasonable Price (QARP) approach, which focuses on high-quality companies that are available at valuations that are reasonable relative to their fundamentals. The fund uses both relative valuation measures such as price-to-earnings ratio, price-to-book ratio, free cash flow yield and EV/EBITDA, as well as discounted cash flow analysis (DCF) to compare valuations with peers and net asset value.
The third category, called caterpillar stocks, includes companies that have already built strong and visible economic moats, but whose current financials do not yet reflect this strength. These companies may show subdued profits or profitability due to industry stress or heavy investment phases. However, advantages such as scale, network strength or customer franchise position them for future profit bends.
The fourth segment focuses on mean reversion opportunities: high-quality companies that have suffered temporary setbacks due to industrial accidents or one-off events.
Active vs passive
SBI Mutual Fund already offers passive variants that track the Nifty 200 Quality 30 Index – an ETF launched in December 2018 and an index fund launched less than a year later – which together manage assets of around ₹387 crore. However, the SBI Quality Fund is actively managed, allowing discretion in stock selection and portfolio weightings.
The fund manager highlights two major shortcomings of the quality index. First, it ignores earnings growth potential and focuses largely on backward-looking profitability, debt levels and earnings stability. Second, its purely quantitative and forward-looking nature ignores qualitative assessments of economic barriers. As a result, emerging quality companies that lack current metrics may be excluded, while companies with deteriorating competitive advantages may remain included. The active fund tries to address both gaps.
The final portfolio is expected to contain approximately 30 stocks. Although there are no explicit market capitalization restrictions, the fund is likely to favor large-cap stocks given the higher concentration of quality companies. Sectorally, the portfolio is expected to favor sectors such as IT, pharmaceuticals, capital goods, consumer goods and consumer services. In comparison, ICICI Prudential’s quality fund has higher allocations to pharmaceuticals, IT and banking, while WhiteOak’s quality fund focuses on banking, IT and auto. As of December 2025, their allocations to large caps stood at 66 percent and 47 percent, respectively.
What should investors do?
The SBI Quality Fund is a thematic offering, and investors should be aware that thematic funds are cyclical and inherently riskier, and often go through prolonged phases of underperformance. Quality factors tend to lag during speculative bull markets – when momentum favors high-beta, lower-quality stocks – and during sharp value-based rebounds, when distressed companies rebound strongly. However, quality strategies tend to perform well during market downturns, as they provide downside protection through stronger balance sheets, and during late cycle phases, when earnings stability becomes critical. Post-crisis recovery is also often beneficial for quality, as investors prioritize sustainable business models.
The current market environment appears supportive of the quality factor, which has underperformed value over the past three to four years following the post-coronavirus recovery. Historically, quality and value have had a see-saw relationship: value performs well during early-cycle recoveries and periods of high inflation, and quality tends to outperform during growth phases and market downturns.
The fund is benchmarked against the Nifty 200 Quality 30 Index, a strategy known for its lower drawdowns and volatility compared to broader market indices. During the 2008-09 global financial crisis, the Nifty 200 fell by around 63 percent, while the quality index fell by roughly 54 percent. Similarly, the Nifty 200 fell 37 percent during the Covid crash, compared to a 28 percent decline in the quality index.
Five-year rolling return data shows that the Nifty 200 Quality 30 TRI delivered an annualized compound return of 15.2 percent, outperforming the Nifty 50 and Nifty 200 TRI, which returned 13.5 percent and 14.2 percent, respectively. Interestingly, the quality index outperformed the Nifty 50 in 73 percent of the periods analyzed.
Investors looking for exposure to a high-quality equity portfolio with return potential on par with the Nifty 50 can consider investing a small portion in this fund. Given its cyclical nature, a minimum investment horizon of seven years or longer is recommended. A systematic investment plan may also be considered, especially in the current uncertain stock market environment.
Published on January 31, 2026
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