NFO Pick – (ICICI Prudential Quality Fund)

13 May 2025 , 10:37 AM

HOW ICICI PRUDENTIAL QUALITY FUND DEFINES QUALITY

The ICICI Prudential Quality Fund NFO defines quality in terms of 3 very critical parameters. Here is a quick tome on what the fund is all about.

• The first approach to quality is financial quality. This has a wide definition, but can be narrowed down to key parameters like higher return on equity (ROE), leverage under control, strong coverage ratios, regular net cash generation, prudent capital allocation to optimize shareholder returns etc.
  
• The second approach pertains to non-financial quality. This inter alia includes; entry barriers or business moat, strong brand image, loyal customer base, management bandwidth, clear succession plan, product excellence, service quality, sensitivity to customer feedback, superior cost management, IP advantages etc.
  
• The third approach to quality is about the valuation and the price that you have pay for the stock. The idea is to have a trade-off. Great companies never come cheap, but they do give opportunities. It is in tough market conditions that quality stocks stand out; which is why quality as a theme works better in tough market conditions.

But, why quality can be an overpowering theme at the current juncture?

CURRENT SITUATION MAKES A CASE FOR QUALITY INVESTING

There are several factors that have made business conditions difficult for Indian companies. Firstly, the global tariffs and the border situation have added a layer of uncertainty to most businesses. Secondly, the string of rate hikes since 2022 have resulted in elevated interest burden on Indian companies. There is a subtle economic slowdown; characterized by weak urban demand, tepid rural demand, supply chain bottlenecks,  and cautious consumers.

If you look at how various themes have performed in the past; then quality has been a dominating theme during times of an economic slowdown and in times of moderating growth. India is seeing that kind of scenario today. Also, Quality has been a modest performer in growing markets, but an underperformer in an economic recovery. The current uncertainty makes a strong case for quality, as the first two scenarios look more likely.

DECIPHERING THE QUALITY STORY IN INDIA

In India, between 2012 and 2020; quality was the best performing theme in 4 years. However, post 2020 when economic recovery was engineered with a liquidity boost, quality theme has underperformed. Currently, quality theme is well poised. Also, timing of entry makes a big difference in playing the quality theme and this is the appropriate time. The quality theme in India is largely sector agnostic and market cap agnostic.

ICICI Prudential Quality Fund will start with a universe of 625 companies and distil it to 250 companies based on financial and non-financial quality filters. This will be further distilled to 40-60 companies by applying valuation filter. If you look at 5-year daily rolling returns; only Quality theme never had a negative return year and also has the highest probability of returns in the range of 10% to 20%. Above all, over the last 20 years, the Nifty 200 Quality 30 TRI has outperformed the Nifty 200 TRI by 560 basis points CAGR.

GLANCE AT THE ICICI PRUDENTIAL QUALITY FUND NFO

Here are key details of the ICICI Prudential Quality Fund NFO.

• The NFO opened on May 06, 2025 and closes on May 20, 2025. The allotment date for units will be within 15 days from the close of subscription of the NFO. It is an open-ended equity scheme following quality factor as the theme.
  
• On the risk-o-meter, ICICI Prudential Quality Fund is classified as “Very High Risk Fund,” due to its predominant exposure to equities and, within equities, to a specific theme of quality, which is normally an outperformer in tough times.
  
• Investment objective is to focus on quality equity stocks including financial quality, business quality, management quality, and valuations. Focus is long term wealth creation and the performance will be benchmarked to Nifty 200 Quality 30 TRI.
  
• There is no entry load. If the units are redeemed within 12 months of the date of allotment, an exit load of 1% on redemption value will be applicable. There will be no exit load applicable if the units are held for a period beyond 12 months. However, investors are advised to hold for minimum 5-7 years to realize full theme benefits.
  
• ICICI Prudential Quality Fund offers Regular and Direct plans. Additionally, the fund also offers the Growth option and the IDCW option to investors. Ihab Dalwai and Masoomi Jhurmarvala will be the designated fund managers.
  
• Minimum application amount in NFO will be ₹5,000 and additional investments have to be of ₹1,000 minimum. The fund supports SIP, STP, and SWP plans. Investors can register for SIP, SWP, STP at the time of the NFO itself.
  
• Being an equity fund with focus on quality theme, there is no return guarantee on the fund. The goal of the fund is to outperform Nifty 200 Quality 30 TRI. However, investors will have to evaluate the performance of the fund over a period of 5 years and above.
  
• ICICI Prudential Quality Fund, is classified as an equity fund for tax purposes. STCG tax (under 1 year), will be taxed at 20.8% (including surcharge). LTCG tax (1 year or more), will be taxed at 12.5%, after maximum exemption of ₹1.25 Lakhs per financial year.

ICICI Prudential Quality Fund focuses on quality as a theme and defines quality in terms of balance sheet quality, product quality, strategy quality, management bandwidth, and valuation quality. Traditionally, it has been an outperformer in tough economic conditions.