Bandhan Nifty 200 Quality 30 Index Fund: Can It Add to the Quality of Your Portfolio?

Factor Investing in recent years has gained popularity. This is because of the growing awareness around passive investment strategies -- through unique Index Funds and equity-oriented Exchange Traded Funds (ETFs) -- particularly at a time when certain actively managed equity funds have failed to deliver alpha or outperform their respective underlying benchmark index.

Factor investing could follow certain attributes or strategies viz., alpha, momentum, market cap size, value, low volatility, and quality. Investors are increasingly warming up to these types of factor-based Index Funds and ETFs rather than the plain vanilla ones. Each type of Factor Investing strategy is distinctive, offers diversification, helps in managing the risk, and has the potential to outdo the broader market indices or the usual vanilla indices.

In other words, Factor Investing aims to deliver superior risk-adjusted returns by selecting stocks based on specific attributes, providing a balanced approach to investing. Moreover, it is a cost-effective way of tapping into the benefits.

Speaking of the 'Quality' Factor Investing, the aim is to identify stocks of companies that have strong corporate governance, low debt, and consistent returns.

High-quality stocks are identified using parameters like Return on Equity (ROE), earnings stability, debt-to-equity ratio, dividend payout record, cash flows, etc. And, usually, quality stocks tend to outperform their peers during a weak macro environment.

The benchmark indices that measure the performance of high-quality companies across market cap and sectors are the Nifty Midcap 150 Quality 50 TRI, Nifty100 Quality 30 TRI, Nifty 200 Quality 30 TRI, and S&P BSE Quality Index.

Offering a unique proposition to diversify, mutual fund houses in the recent past have launched several such schemes (and other multi-factor factor index funds and ETFs).

Bandhan Mutual Fund also launched two factor-based index funds (a value-based index fund and a momentum-based index fund) in October 2024, and now in November 2024, has launched the Bandhan Nifty 200 Quality 30 Index Fund.

It is an open-ended equity scheme tracking the Nifty 200 Quality 30 Index, and thus returns would commensurate with that of this underlying benchmark index.

During the NFO period, the Scheme is open for subscription from November 18, 2024, to November 29, 2024. Thereafter the scheme re-opens for subscription on December 5, 2024.

The focus of the Bandhan Nifty 200 Quality 30 Index Fund will be on investing in companies with high profitability, lower debt, and more stable earnings. This Scheme replicates the Nifty 200 Quality 30 Index, tracking 30 companies selected based on their ROE, debt-to-equity ratio, and variability in Earnings Per Share (EPS) over the previous five years.

The aim is to capture the premium associated with high-quality stocks. So, it is akin to choosing a reliable, time-tested brand known for its relatively consistent performance.

The Scheme will allocate 95% to 100% of its total assets in securities belonging to the Nifty 200 Quality 30 Index (including stock and index derivatives).

The net assets of the Scheme will be invested in stocks constituting the Nifty 200 Quality 30 Index. This would be done by investing in all the stocks comprising the Nifty 200 Quality 30 Index in the same weightage that they represent in the Nifty 200 Quality 30 Index.

The exposure to derivatives, both for hedging and non-hedging purposes, shall be up to 20% of net assets. The Scheme may take exposure to equity derivatives of the index or its constituent stocks when equity shares of the underlying index are unavailable or not available in sufficient quantities, subject to a rebalancing period (within 7 days).

The Scheme may engage in securities lending up to 20% of the total assets with maximum single counterparty exposure restricted to 5% of the total assets.

The Scheme may also engage in short selling of securities in accordance with the framework relating to short selling and securities lending and borrowing.

Up to 5% of the total assets will be invested in debt & money market instruments permitted by SEBI/RBI to meet the liquidity requirements of the scheme and for meeting margin money requirement for the Nifty 200 Quality 30 Index futures and/or futures of stocks belonging to the Nifty 200 Quality 30 Index Fund.

Money Market Instruments include Commercial Papers (CPs), Commercial bills, Treasury bills (T-bills), Government securities (G-secs) having an unexpired maturity of up to one year, call or notice money, Certificate of Deposits (CDs), Bills Rediscounting, Repos, Triparty Repo, usance bills, and any other like instruments as specified by the RBI from time to time.

The Scheme will not invest in the following:

• Credit default swaps

• Repo/Reverse repo in corporate debt securities

• Debt Instruments having Structured Obligations (Sos) / Credit Enhancements (CEs)

• Debt Instruments with Special Features (AT1 and AT2 Bonds)

• REITs and InVITs

• Commodity Derivatives

• Debt Derivatives instrument

• Securitised Debt

• Overseas securities

What is the Investment Objective?

The investment objective of the Scheme is to replicate the Nifty 200 Quality 30 Index by investing in securities of the Nifty 200 Quality 30 Index in the same proportion/weightage with an aim to provide returns before expenses that track the total return of Nifty 200 Quality 30 Index, subject to tracking errors.

However, there is no assurance or guarantee that the objectives of the scheme will be realised and the scheme does not assure or guarantee any returns.

What Is the Investment Strategy?

The Scheme will be managed passively with investments in stocks in proportion to the weights of these stocks in the Nifty 200 Quality 30 Index.

The investment strategy would revolve around reducing the tracking error through rebalancing of the portfolio, considering the change in weights of stocks in the index as well as the incremental collections/redemptions from the Scheme.

The tracking errors may result from a variety of factors including but not limited to:

• Any delay experienced in the purchase or sale of shares due to illiquidity of the market, settlement and realization of sale proceeds and/or the registration of any securities transferred and/or any delays in receiving cash Income Distribution cum Capital Withdrawal (IDCW) and resulting delays in reinvesting them.

• The Nifty 200 Quality 30 Index reflects the prices of securities at the close of business hours. However, the Fund may buy or sell the securities at different points of time during the trading session at the then prevailing prices which may not correspond to the closing prices on the NSE.

• India Index Services & Products Ltd (IISL) -- now known as the NSE Indices Ltd. -- undertakes periodic reviews of the securities that are represented in the Nifty 200 Quality 30 Index and from time to time may exclude existing securities or include new ones. In such an event, the Fund will endeavour to reallocate its portfolio, but the available investment/disinvestment opportunities may not permit precise mirroring of the Nifty 200 Quality 30 Index in a short period of time.

• The charging of expenses to the Fund including investment management fees and custodian fees.

• The potential for trades to fail which may result in the Scheme not having acquired shares at a price necessary to track the index.

• The holding of a cash position and accrued income before distribution and accrued expenses.

• Disinvestments to meet redemptions, recurring expenses, IDCW payouts etc.

The performance of the Scheme is benchmarked against the Nifty 200 Quality 30 Index.

About the Nifty 200 Quality 30 Index

The Nifty 200 Quality 30 Index (launched on April 17, 2018, with the base date as April 1, 2005) aims to cover companies which have durable business models resulting in sustained growth. This index consists of 30 companies selected from the Nifty 200 index, based on ROE, debt-to-equity ratio and variability in EPS in the previous five years.

The weights of the stocks in the Nifty 200 Quality 30 Index are derived from their Quality scores and the square root of free-float market capitalisation.

The stocks from the Nifty 200 index at the time of review are eligible for inclusion in the Nifty 200 Quality 30 Index. This index is rebalanced semi-annually in June and December.

The Nifty 200 Quality 30 Index has a dominant exposure to large caps along plus has in it some midcap and smallcap companies.

As regards, sector representation it has a diverse exposure. Currently, this index has the highest weight for Information Technology (of 30.2%) and the lowest weight for Media, Entertainment & Publication (of 0.9%).

The top 10 constituents of the Nifty 200 Quality 30 Index are as under:

The tables below reveal that the average performance of the Nifty 200 Quality 30 Index on an average has been better than broader market indices.

Moreover, even during the testing times, such as the Global Financial Crisis of 2008, the taper tantrum crisis of 2013, the Yuan devaluation (in 2015-16), and the COVID-19 pandemic, when the Indian equity market witnessed a drawdown, the Nifty 200 Quality 30 Index fell less compared to the broader market indices.

This shows having exposure to quality stocks, makes a difference to the risk and returns. It provides higher risk-adjusted returns with lower volatility.

Here's what Mr. Vishal Kapoor, CEO of Bandhan AMC said about the launch of the Bandhan Nifty 200 Quality 30 Index Fund:

"There is a growing shift towards large-cap, high-quality stocks that offer resilience and stability as the economies are facing various headwinds. Quality stocks, with their solid financial fundamentals, have become a favoured choice, especially in uncertain markets. The Nifty 200 Quality 30 Index targets companies with robust profitability, manageable debt levels, and consistent earnings, aiming to deliver better risk-adjusted returns with lower volatility."

Who Will Manage Bandhan Nifty 200 Quality 30 Index Fund?

Mr Nemish Sheth is the fund manager of the Scheme. He has a total work experience of over 13 years, is a commerce graduate (B.Com) and has a post-graduate diploma in management studies with a specialisation in finance (PGDM - Finance).

Nemish is currently an Associate Vice President - Equity at Bandhan AMC. He joined the equity fund management team of Bandhan AMC in November 2021 and was earlier associated with Nippon Life India Asset Management Ltd. as a dealer handling the execution of equity, arbitrage and ETF trades.

Before that, he was also associated with ICICI Prudential Asset Management Company Ltd. as a dealer from August 2011 to December 2018 handling execution of Equity, Arbitrage and ETF trades.

At Bandhan Mutual Fund, Nemish manages various other Index Funds and equity-oriented ETFs.

How much is the Minimum Investment in Bandhan Nifty 200 Quality 30 Index Fund?

During the NFO period and ongoing basis, the minimum investment in the Scheme is Rs 1,000/- and in multiples of Re. 1/- thereafter.

For the Systematic Investment Plan (SIP), the minimum SIP amount is Rs 100/- and in multiples of Re. 1 thereafter (Minimum 6 instalments).

In case you are considering the Systematic Transfer Plan (STP), the minimum amount is Rs 500/- in multiples of Re. 1 thereafter.

The Scheme offers both, the Direct and Regular Plan and only the Growth Option for investment. There is no option of Income Distribution cum Capital Withdrawal (IDCW) for investors.

Who Should Consider Investing in Bandhan Nifty 200 Quality 30 Index Fund?

Historical evidence suggests that financially strong companies exhibit superior returns with lower risk.

However, the effectiveness of the Quality factor stems from mispricing. Often investors prioritise short-term performance, overlooking high-quality companies with consistent long-term results, leading to undervaluation. Overconfidence in chasing lesser-known opportunities can result in overpricing, although high-quality firms tend to outperform in the long term.

So, while there are benefits of 'Quality' Factor Investing, it could perform differently depending on the market conditions. Quality as well as low volatility are defensive traits of Factor Investing. In case of market conditions favouring momentum or alpha investing, the returns of 'Quality' Factor Investing in comparison may look insipid. So, each type of Factor Investing strategy has a distinct risk-return trait.

The Bandhan Nifty 200 Quality 30 Index Fund is for investors looking to create wealth over the long term, seeking relatively stable earnings and sustainable growth, wish to follow a defensive Factor Investing strategy to their portfolio (with exposure to Nifty 200 Quality 30 stocks) and have a very high-risk appetite.

In the volatile Indian equity market conditions, the Nifty 200 Quality 30 Index Fund could potential stability to your portfolio but does not guarantee positive returns always.

At present, the Price-to-Equity (P/E) and Price-to-Book Value (P/BV) ratio of the Nifty200 Quality 30 Index is around 34x and 10x, respectively -- which cannot be considered reasonable - and thus one ought to have a very high-risk appetite and investment horizon of at least 3 to 5 years to invest in Bandhan Nifty 200 Quality 30 Index Fund.

To know more about the Bandhan Nifty 200 Quality 30 Index Fund, read the Scheme Information Document and Key Information Memorandum.

Happy Investing!