Quality Factor Always Delivers: From Large Cap to Small Cap

• Date : October 16,2025

Quality investing is like choosing to grow a healthy plant instead of just grabbing the cheapest saplings. While those healthy trees might cost more upfront, they not only bear fruit year after year but also help weather storms and climate change. Over time, the orchard flourishes and provides consistent, reliable harvests, just as high-quality companies are expected to deliver steady returns in the long run.

Quality investing identifies companies that have strong financial health with potential for growth over the long term. The beauty of quality is that it works across sizes, be it large-cap, mid-cap, or small-cap.

The Cross-Cap Pattern

When the quality factor is tested across the market caps, quality companies tend to deliver higher risk-adjusted returns, steadier compounding, and better downside protection. The pattern here is evident: whatever the size is, large, mid, or small, quality will always act as a primary driver of long-term performance.

Market Capitalisation	Portfolio	CAGR (%)	Annualized Volatility (%)	Max Drawdown	5 Year Probability of Loss	Median Rolling Return
						1 Year	3 Year	5 Year	10 Year
Large Cap	Top Tercile	13.29	17.60	-55.22	0.02	12.84	14.77	13.91	13.94
	Middle Tercile	12.32	21.38	-66.30	1.72	11.39	13.66	12.05	12.88
	Bottom Tercile	11.62	24.81	-75.09	11.23	11.32	13.19	11.07	11.28
	Large Cap	12.64	20.60	-66.39	0.86	11.57	13.74	12.12	12.93
Mid Cap	Top Tercile	18.27	17.07	-63.17	0.00	17.65	19.65	20.11	20.21
	Middle Tercile	15.02	21.27	-69.23	0.27	12.77	17.68	15.06	16.62
	Bottom Tercile	8.28	24.98	-80.39	27.45	6.85	9.28	6.77	6.92
	Mid Cap	14.05	20.50	-71.61	1.51	12.05	15.78	13.67	14.96
Small Cap	Top Tercile	18.01	18.29	-63.35	0.00	15.14	21.78	20.38	20.81
	Middle Tercile	12.39	22.17	-73.19	4.47	13.53	17.87	11.30	14.17
	Bottom Tercile	8.28	24.57	-75.66	18.28	4.95	10.28	6.01	7.62
	Small Cap	13.04	21.18	-71.24	2.53	10.98	16.81	12.62	14.24

Source: CMIE, Internal Research, NJ’s Smart Beta Platform (in-house proprietary model of NJAMC) and NSE. Data for the period September 30, 2006 to February 28, 2025. Large Cap stocks are defined as the top 100 stocks by market capitalization, Mid Cap stocks as the next 150 stocks, and Small Cap stocks as the remaining 250 stocks from the Nifty 500 universe. Quality is measured using a composite score based on Return on Equity (ROE), Dividend Payout Ratio, and Debt-to-Equity Ratio. Past performance may or may not be sustained in the future and is not an indication of future returns.

Large Caps: Quality at Its Most Reliable

High-quality large caps have been the cornerstone of consistent wealth creation. They create wealth with stability and can withstand market shocks.

A few traits of Large-Cap Companies:

• Lower volatility and shallow drawdowns provide stability throughout market cycles.
• Lower loss probability due to multiple or diversified revenue streams and sound financial management.
• Wealth creation over time due to stable earnings and better capital allocation.

For investors, large-cap companies represent the balance between capital preservation and sustainable growth. This is a combination that anchors portfolios and builds confidence in uncertain times.

Mid Caps: The Bridge Between Growth and Stability

High-quality mid-caps come in the middle of the market’s growth curve. These companies have already outgrown their uncertain beginning years, but are still far from the size and stability of large caps. They’re in the growing stage: scaling operations, strengthening balance sheets, and managing growth more predictably.

A Few Common Traits of Mid-Cap Companies:

• Have strong growth potential as profitability and efficiency have improved.
• Sound and evolving balance sheets with quality management with good capital allocation.
• Higher volatility can test an investor’s patience during volatile markets.

Quality among mid-caps combined with strong governance and capital discipline smooths out rough edges, but mid-caps still move with the market swings. 

Small Caps: Where Quality Makes the Crucial Difference

High-quality small caps stand out as the difference between potential and performance. As small-cap companies carry higher risk, they also hold immense opportunity. Hence, within this space, quality becomes the defining filter, helping investors distinguish resilient businesses from speculative ones.

A Few Common Traits of Small-Cap Companies:

• High growth potential allows small caps to expand and mature, and hence they can deliver significant returns over time.
• Greater volatility due tothinner trading volumes and higher market sensitivity, price movements can be more pronounced.

Quality among small caps turns ambition into endurance. For investors, identifying such quality-driven small caps can unlock the next wave of long-term wealth creation.

Conclusion

No matter the market size, quality remains the true compass for investors seeking consistent, durable returns. Market capitalisation tells you how big a company is, but quality tells you how well it runs. Quality never goes out of style, no matter the size of the company. Be it large-cap or small-cap, applying a layer of quality allows investors to create long-term wealth.

FAQs:

1) Why is quality important in investing?
Because high-quality companies act like strong, healthy trees, they withstand unexpected market storms and continue to grow steadily, delivering reliable returns year after year.

2) How does quality investing protect against downside risk?
High-quality companies typically have lower volatility due to diversified revenue streams, strong cash flows, and prudent management, helping them weather market shocks.

3) Does quality investing guarantee higher returns?
Not necessarily in the short term, but it aims for consistent, sustainable returns over the long term with lower drawdowns.

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

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