The Importance of Quality in Large Cap and Mid Cap Investing

The hunt for quality can take on many different forms.

I distinctly remember my grandfather screening every single piece of the vegetables in front of him for quality, during his daily shopping rounds.

I also remember how my aunt would stroke the fabric of the multiple outfits she liked, before zeroing in on the ones to purchase.

Then there is my six-year old niece, who says cake that isn’t chocolatey enough is low-quality.

Quality is queen

If I google “Quality Mumbai”, I can see hundreds of stores that claim to sell quality products, from quality shoes to quality instruments. We all have our own quality parameters that we look for in our everyday lives. The luxury segments of some consumer brands price their products ten times higher than more mass-market offerings, mainly in the name of quality. In fact, you could argue that brands succeed mainly because of the quality they deliver — whether at reasonable prices or at exorbitant ones.

For someone like me whose favorite weekend pastime is trying new cuisines and restaurants, quality screening is a weekly activity. There’s not much I have to do if I’m going to a Taj or a Trident: clearly, their quality is beyond reproach, so my decision to go for them is based solely on my willingness to pay and the alignment between my temperament and their offerings.

This is a lot like my large cap investing. How I invest in large caps depends on my asset allocation and current valuations. For someone who is not into bottom-up stock picking, the pool of large caps can be compared to the pool of fancy dine-ins. All of them are good, all of them are high-quality and they are all similar in price.

Vetting before betting

To continue with the restaurant metaphor, when it comes to trying new places — something I’m fanatical about — I do considerably more research. From ratings to preparation types, everything starts to matter. I end up spending a fair amount of time trying to figure out the kind of people visiting the place. Are there any honest reviews, or is it all paid promotion? I have gone as far as calling up a place and asking what kind of oil they use. All for the sake of quality!

To squeeze out even more from this metaphor, let’s turn our attention to humbler street-side joints now. From ‘samosa walas’ to ‘paani-poori walas’, we all have our individual preferences. Last week, during a trip to Banaras, I spent a considerable amount of time trying to home in on the best chaat in town. And figuring out which kinds of chaat I’d like to try, in a city that offers 50+ kinds of chaat.

Such street joints are like my mid-cap investing. I broadly know the sectors I want. I know I want good quality, and I will conduct more rigorous checks than I would for a large cap. Before the social media/Zomato era, my due diligence for restaurants used to take a lot of time. However, such websites can now recommend some great restaurants to me. They can also give me curated lists of places to eat at. At a negligible cost, I can filter quality restaurants using my own criteria.

Invest with the assurance of quality

Ever wondered if you could do that with investing as well? We all know of the importance of good equity returns, debt-to-equity ratios, and consistently growing earnings. Why not invest in companies that fit the bill, and have been specially been curated, that too at a low cost?

Well, you just need to either build the expertise to uncover ‘quality’ or hire someone who can help you do the same. Perhaps by investing your money in a fund managed by a portfolio manager whose expertise in this space can be studied by going through their frameworks- but then how many fund managers have documented frameworks in the first place? (Note from the editor: DSP’s fund managers do.Check this out.)

Or like we often say, find an expert financial consultant like a Mutual Funds Distributor who can give you the right advice and guide you to make responsible investment decisions. (How do you find one? Simply comment below this blog and we’ll connect you to someone.)

But there is an even simpler way, where you don’t need a fund manager or even someone giving you advice. While almost every mutual fund is sold as ‘quality’, there are also indices themselves that are built on quality. Which means you could invest in a certain pocket of the market without any human bias, any ‘tactical’ interference and that too at a lower cost than most actively managed mutual funds! Isn’t it a cool method that allows you to invest in stocks with good potential to grow, based only on facts, numbers, reality? (We have a fund for that too! Check this out)