Quality Factor Barely Moved in 20 Months. So Why Is This Quality Portfolio Up 19.8% a Year?

Quality has been a tough factor for investors recently. The NIFTY200 Quality 30 index reached its high in September 2024 and remains down 18.5% from that peak. Since 2021, it has lagged behind the broader NIFTY LargeMidcap 250 every year, including 2026 so far, and has underperformed the NIFTY 500 in five out of the last six years.

The Quality Bluechips – Quant smallcase selects stocks based on quality and momentum. You might expect it to have struggled too. But from its launch on 24 February 2025 to 21 October 2026, it delivered an annual return of 19.8%. In comparison, the NIFTY200 Quality 30 returned just 0.6% a year, and the NIFTY200 Momentum 30 returned 0.8%. Both of these indices also focus on quality and momentum stocks from the NIFTY 200, which is similar to the smallcase’s top 250. This shows how the factors themselves performed.

This article looks at the rebalance data to see how this happened and what it means now that the portfolio has changed so much.

The Quality Drought in Numbers

Performance from launch, 24 February 2025, to 21 October 2026:

The smallcase selects stocks from India’s top 250 companies by market cap. The NIFTY LargeMidcap 250 covers almost the same group: the 100 biggest companies and the next 150 midcaps. This index reflects how the smallcase’s entire stock pool performed, returning 5.3% a year. Quality Bluechips – Quant outperformed it by 14.5 percentage points each year. That’s a rare result!

If you look further down the table, the smallcase filters for two things: business quality and price trend. The NIFTY200 Quality 30 returned just 0.6% a year, while the NIFTY200 Momentum 30 returned 0.8% a year. Both barely changed over 20 months.

So, neither factor worked on its own. Still, the portfolio that combined both delivered a 19.8% annual return. Clearly, it wasn’t just the individual factors that made the difference.

What Actually Carried It: The Tilt to Gold

The smallcase is designed to hold 15 stocks from the top 250 that pass both the quality and price trend screens, with each stock given an equal weight of 6.67%. If fewer than 15 stocks qualify, the remaining weight is moved out of equities into gold and liquid etfs.

Until July 2026, any unallocated weight was put into a gold ETF as a defensive measure. Starting with the August 2026 rebalance, this amount is split, with 60% going to gold and 40% to liquid assets through the Zerodha Nifty 1D Rate Liquid ETF. For example, if 10 stocks qualify, the portfolio would have 66.67% in stocks, 20% in gold, and 13.33% in the liquid ETF.

In a healthy market, this rule is not expected to be used often. However, for Quality Bluechips – Quant, it applied right from the start. Only 8 stocks qualified at launch, so gold made up 46.7% of the portfolio.

The shortfall was not due to quality. Each month, at least 84 of the top 250 stocks were in the top quality group. The issue was the lack of a steady price trend, so the shortfall continued. Between July and November 2025, only five stocks qualified, so gold made up about two-thirds of the portfolio. From launch to July 2026, gold averaged 51% of the portfolio at each rebalance.

This made a big difference. The Zerodha Gold ETF’s rally peaked on 29 January 2026, the same day Quality Bluechips – Quant reached its highest point. From 30 June 2025 to that peak, the gold ETF rose by 83.7%. The smallcase gained 39.9%, while the LargeMidcap 250 fell by 1.4%.

The same exposure had the opposite effect afterwards. The gold ETF dropped 17% over two sessions on 30 January and 1 February, and by 23 March, it was 24% below its peak. The smallcase continued to hold gold because the rule does not decide when to buy or sell gold. Gold is only used when there are not enough qualifying stocks, and between February and July, only 6 to 9 stocks passed both screens at each rebalance. With gold still making up 36% to 57% of the portfolio, the smallcase lost 10.0% between 29 January and 4 August 2026, while the LargeMidcap 250 gained 3.7%.

Over its entire holding period, from 3 March 2025 to 5 October 2026, the Zerodha Gold ETF returned 70.8%.

Most of the return came from the gold allocation, not from picking stocks.

What the Equity Portion Actually Looked Like

It’s also important to take an honest look at the stocks themselves.

From 3 March 2025 to 4 September 2026, the smallcase held 31 different stocks. We compared each holding to monthly quality scores for 2,400 to 3,000 listed companies, which sorts stocks into five groups. Q1 is the top 20% for quality.

The quality screen worked well. Out of 141 holding slots during those rebalances, 130 (92%) were in Q1. Only four stocks were ever outside Q1:

• ICICI Bank and Kotak Mahindra Bank slipped to Q2 while held, in mid-2025.
• AU Small Finance Bank was in Q2 when it was bought in August 2026.
• Torrent Pharma was in Q1 when it was added in both March 2025 and March 2026. It moved to Q3 from June 2026, after its FY2026 financials were included. Since it still met the strategy’s other criteria, it was not sold.

The stock picks showed a clear pattern: fewer winners, but bigger ones. Some stocks were bought, sold, and then bought again, so we looked at each of the 38 holding periods separately. The 14 winners gained an average of 15.3%, about twice the 7.8% average loss on the other 24.

The top winners made a big impact. BSE gained 67% from March to July 2025, Bharat Electronics rose 45% from March to September 2025, and Torrent Pharma gained 19% in its first period. On the losing side, the biggest single loss was 13.4% in Mazagon Dock.

The rules also helped cut losses quickly. Winning positions were held for an average of 179 days, while losing ones were held for just 75 days.

The rules allowed the winners to keep running and quickly cut the losers.

The Phase-by-Phase Picture

Splitting the smallcase’s life by how much gold it held makes the pattern clear.

During the first four months, about half of the portfolio was in gold. The smallcase kept up with the rising market, gaining 14.5% compared to 16.2% for the LargeMidcap 250.

In the second half of 2025, equities stayed flat while gold surged. For much of this period, two-thirds of the portfolio was in gold, and the smallcase gained 39.9%. Most of its lead came from this stretch.

Starting in February 2026, gold prices dropped, and the gold ETF fell 20.1% by August 4. The smallcase lost 10.0% during this period, while equities rose.

After August 2026, things shifted. More stocks passed both screens: 8 in August, 12 in September, and 11 in October. With the new 60:40 split, gold made up 11–26% of the portfolio, and the liquid ETF held 8–18%. Now, about three-quarters of the smallcase is in stocks.

Since then, during the market decline, the smallcase lost 6.4%, which is less than the losses for the LargeMidcap 250 and both factor indices. Gold and the liquid ETF helped cushion the loss.

An Honest Assessment

From February 2025 to October 2026, the numbers show a clear trend. The quality factor, which is the foundation of this smallcase, had one of its toughest periods in years. Not many quality stocks showed strong price trends, so the strategy shifted the unused slots to gold. Gold then performed exceptionally well.

The annual return of 19.8% since launch shows this pattern. Most of the gains came from the gold allocation, though some were lost when gold prices dropped. The stock selections stayed high quality, but these stocks did not always deliver strong returns during this time.

For smallcase investors, the main point is simple. The strategy worked as intended by avoiding investment in quality stocks with weak trends. Now that more stocks meet the criteria, the portfolio is back to being mostly in equities. Future returns will depend more on how quality stocks do.

Factors such as quality can be popular or out of favour for long periods. This is a normal part of equity investing, and it shows why having rules for when to own stocks, not just which ones, is important.

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