Combining Quality and Value in Investing: The QARP Approach

• Date : August 27,2025

For decades, value Investing has been a cornerstone strategy, rooted in the works of Benjamin Graham and Warren Buffett. In India, too, many investors are drawn to stocks with low price-to-earnings (P/E) or price-to-book (P/B) ratios, expecting them to “revert to their true worth” over time.

But here’s the reality: not every stock that looks cheap is a good investment; some stay cheap for a reason.

Whether it’s poor earnings quality, excessive debt, governance lapses, or a weakening business model, these are classic value traps. And in emerging markets like India, where accounting practices vary and corporate transparency is still evolving, such traps are not uncommon. That’s where the quality factor comes in, as a crucial filter.

What is Value Factor in Investing?

In simple terms, value factor investing is about identifying and investing in companies that are trading below their intrinsic worth. Traditionally, this is measured through financial ratios like price-to-earnings (P/E), price-to-book (P/B), etc.

Academically, the value factor was formalised by Fama and French in their 1992 three-factor model, where it was identified as one of the key drivers of long-term stock returns, alongside size and market risk.

Over the long term, value strategies have delivered meaningful outperformance. However, their effectiveness can vary over time. When applied in isolation, value can be cyclical, inconsistent, and at times, even risky.

Why Value Isn’t Always Valuable?

Low valuation alone doesn’t make a stock worth buying. In fact, it can often mask deeper problems such as:

• Weak or declining earnings
• High levels of debt or persistent negative cash flows
• Governance issues or a lack of transparency
• A structurally challenged industry
• Earnings are temporarily inflated by the market cycle

Focusing only on valuation and ignoring the quality of the business runs the risk of higher drawdowns, long stretches of underperformance, and poor risk-adjusted returns.

Why Quality Matters in Value Investing?

The Quality factor helps address these gaps in traditional value investing. True quality lies in companies with clean balance sheets, steady cash flows, prudent capital allocation, and strong governance, traits that not only help compound wealth steadily over time but also offer resilience during market downturns. Adding the quality factor helps:

• Filter out companies with poor fundamentals or weak governance
• Avoid cyclical earnings traps
• Improve return consistency and downside protection

By combining value with quality, investors can avoid companies with underlying risks and focus on businesses that are both reasonably priced and fundamentally sound.

Performance Analysis of Enhanced Value on Nifty 500 and Nifty 500 Quality 200 Universe
Top 100 Enhanced Value Stocks from	Annulised Return (%)	Annualised Volatility (%)	Maximum Drawdown (%)	5-Year Loss Probability (%)	Median Rolling Return (%)
					1-Year	3-Year	5-Year	10-Year
Nifty 500 Quality 200 Universe	18.38	16.66	-60.38	0.00	16.56	20.68	19.76	19.97
Nifty 500 Universe (NJ Enhanced Value Model)	15.68	18.84	-68.34	0.69	12.46	17.46	16.24	16.53
NIfty 500 TRI	12.69	20.06	-63.71	1.17	11.36	13.40	13.05	13.17

Source: CMIE, NJ Asset Management Private Limited Internal Research NJ’s Smart Beta Platform (in-house proprietary model of NJAMC). Calculations are for the period 30th September 2006 to 31st July 2025. Top 100 Enhanced Value Stocks from the Nifty 500 Quality 200 Universe is constructed by first deriving the Top 200 stocks based on quality using internal proprietary methodology. Furthermore, 100 stocks are derived based on Enhanced Value using internal proprietary methodology. While Top 100 Enhanced Value Stocks from the Nifty 500 Universe represent the NJ Enhanced Value Model. NJ Enhanced Value Model is an in-house proprietary methodology developed by NJ Asset Management Private Limited. The methodologies will keep evolving with new insights based on the ongoing research and will be updated accordingly from time to time.

Performance Analysis of Traditional Value on Nifty 500 and Nifty 500 Quality 200 Universe
Top 100 Traditional Value Stocks from	Annulised Return (%)	Annualised Volatility (%)	Maximum Drawdown (%)	5-Year Loss Probability (%)	Median Rolling Return (%)
					1-Year	3-Year	5-Year	10-Year
Nifty 500 Quality 200 Universe	17.82	19.99	-66.10	0.00	14.72	19.82	16.47	17.27
Nifty 500 Universe (NJ Traditional Value Model	16.48	21.36	-69.35	1.64	12.50	19.60	13.27	16.19
NIfty 500 TRI	12.69	20.06	-63.71	1.17	11.36	13.40	13.05	13.17

Source: CMIE, NJ Asset Management Private Limited Internal Research NJ’s Smart Beta Platform (in-house proprietary model of NJAMC). Calculations are for the period 30th September 2006 to 31st July 2025. Top 100 Traditional Value Stocks from the Nifty 500 Quality 200 Universe is constructed by first deriving the Top 200 stocks based on quality using internal proprietary methodology. Furthermore, 100 stocks are derived based on Traditional Value using internal proprietary methodology. While Top 100 Traditional Value Stocks from the Nifty 500 Universe represent the NJ Traditional Value Model. NJ Enhanced Value Model is an in-house proprietary methodology developed by NJ Asset Management Private Limited. The methodologies will keep evolving with new insights based on the ongoing research and will be updated accordingly from time to time.

Be it Enhanced Value or Traditional Value, the data clearly show that the QARP approach strengthens performance. It delivers improved annualised returns, lower volatility, and shallower drawdowns—proving that QARP is a smarter and more resilient way to invest.

Quality At Reasonable Price (QARP)

Quality at a Reasonable Price (QARP) is an evolved approach that blends the core of valuation with the defensiveness of quality. Unlike traditional value strategies, QARP isn’t about finding the cheapest stocks. It’s about finding companies that are:

• Fundamentally strong
• Capital efficient
• Governed well
• Available at a reasonable price

QARP offers a practical balance. It avoids overpriced “quality” stocks driven by hype and popularity, while also helping avoid low-quality names that only look attractive on the surface.

Premium on Quality: When is it Worth Paying?

Yes, some quality stocks trade at higher P/E ratios, but just as not all cheap stocks are good bargains, not all expensive stocks are overpriced. In many cases, companies with strong fundamentals, clean accounting, and disciplined capital allocation deserve a premium. What’s important is understanding when that premium is justified and when it is risky.

When is it justified?

• High return on capital
• Stable and visible earnings
• Prudent use of capital and cash flows
• Transparent governance

When is it risky?

• Valuations are high without earnings support
• Growth is priced in, but not backed by fundamentals
• Stock performance is driven by popularity or momentum alone

Here’s a simple framework:

	Low P/E	High P/E
Low Quality	Value trap	Overhyped risk
High Quality	QARP Sweet Spot	Premium may be justified

 

Conclusion

Traditional value investing focused mainly on price. But smart investing today needs to go a step further. QARP is that evolution. 

It combines the timeless logic of value with the necessary discipline of quality, offering a smarter way to find fundamentally strong businesses, without overpaying. The goal should not be the lowest price, but the best value for your money, and QARP offers just that.

At NJ Mutual Fund, we believe that true value emerges when quality is made non-negotiable. That’s why our investment approach is 100% rule-based and focused on quality, ensuring disciplined investment processes and long-term resilience across market cycles.

FAQs

1. What is meant by value investing?

Value investing refers to buying stocks that are trading below their intrinsic worth, with the aim of benefiting when the market corrects the mispricing.

2. What is quality value investing?

Quality value investing focuses on buying fundamentally strong companies at reasonable valuations, avoiding cheap but weak businesses. Commonly, this is known as the Quality At Reasonable Price (QARP) approach.

3. What is the difference between quality and value factor investing?

Value factor identifies undervalued stocks based on price ratios, while the quality factor selects financially strong, well-governed companies with consistent performance.

Investors are requested to take advice from their financial/ tax advisor before making an investment decision.

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