Your Questions Answered: What is the difference between Nifty 100 index and Nifty 100 quality 30 index?

Q. Me and my wife have been investing in Nifty 50 tracking mutual funds for the past 8 years. We now intend to diversify by investing in Nifty100 Quality 30 index-tracking mutual funds. Can you tell us the pros and cons of investing in index mutual funds tracking the Nifty100 Quality 30 index? Additionally, please elaborate on the difference between the Nifty 100 index and Nifty 100-quality 30 index.

Prahlad Sihag, Guragaon, Haryana

Introduction

The Nifty100 Quality 30 index is a unique stock market index that aims to capture the performance of the top 30 companies within the Nifty 100 index, based on their quality scores. These quality scores are determined by evaluating three key financial metrics: Return on equity (ROE), debt-to-equity ratio (D/E), and average change in earnings per share (EPS).

The index selects 30 companies from the Nifty 100 based on their quality scores. The primary objective of the Nifty100 Quality 30 index is to provide investors with exposure to high-quality companies that have a durable business model and are expected to deliver sustained growth over the long term. The index comprises 30 companies that are selected based on their quality scores. These companies are typically leaders in their respective industries and have a strong track record of financial performance.

Eligibility criteria for Nifty100 Quality 30 index

The Nifty100 Quality 30 index is designed to include the top 30 companies from the Nifty 100 Index based on their quality scores. As mentioned above, these scores are determined by evaluating three key financial metrics: return on equity (ROE), debt to equity ratio (D/E), and average change in earnings per share (EPS). Here are the detailed eligibility criteria:

1. Universe of stocks

• Nifty 100 membership: Only stocks that are part of the Nifty 100 Index at the time of review are eligible for inclusion in the Nifty100 Quality 30 index.
• Minimum listing history: Stocks must have a minimum listing history of one year to be considered.
• Derivative segment availability: Stocks should be available for trading in the derivative segment (Futures & Options) to ensure liquidity.

2. Financial metrics

• Return on equity (ROE): This metric measures a company’s profitability by revealing how much profit a company generates with the money shareholders have invested. A higher ROE indicates better financial performance.
• Debt-to-equity ratio (D/E): This ratio indicates the relative proportion of shareholders’ equity and debt used to finance a company’s assets. A lower D/E ratio suggests a more financially stable company with less reliance on debt.
• Average change in earnings per share (EPS): This metric shows the average growth in a company’s earnings over a specified period. Consistent EPS growth indicates a company’s ability to generate profits over time.

3. Quality score calculation

• Z-score calculation: For each eligible stock, a Z-score is calculated based on the ROE, D/E ratio, and EPS growth variability over the previous five years. The Z-score helps rank companies based on their financial quality.

4. Selection process

• Top 30 companies: The top 30 companies with the highest quality scores are selected to be part of the Nifty100 Quality 30 index.
• Weightage: The weight of each stock in the index is based on a combination of the stock’s quality score and its free-float market capitalisation.

5. Index review and rebalancing

• Semi-annual review: The index is reviewed and rebalanced semi-annually to ensure that it continues to represent the top-quality companies within the Nifty 100 Index

Benefits of investing in index mutual funds tracking the Nifty100 Quality 30 index

There are a number of benefits associated with investing in index mutual funds tracking the Nifty100 Quality 30 index. We have mentioned the key benefits below.

1. Exposure to high-quality companies: Index mutual funds tracking the Nifty100 Quality 30 index provide investors with exposure to the top 30 companies within the Nifty 100 Index based on their quality scores. These companies are selected based on key financial metrics such as Return on Equity (ROE), Debt to Equity Ratio (D/E), and Average Change in Earnings Per Share (EPS). This ensures that investors are investing in high-quality companies with strong financial performance and growth potential.

2. Diversification: Investing in index mutual funds tracking the Nifty100 Quality 30 index offers diversification across various sectors. The index includes companies from different industries, reducing the risk associated with investing in a single sector. This diversification helps in spreading risk and enhancing the potential for stable returns.

3. Lower expense ratios: Index mutual funds typically have lower expense ratios compared to actively managed funds. This is because index funds aim to replicate the performance of the underlying index rather than actively selecting and managing individual stocks. Lower expense ratios mean that a larger portion of the investor’s money is invested in the market, potentially leading to higher returns over the long term.

4. Transparency: Index mutual funds offer a high level of transparency as they aim to replicate the performance of the underlying index. Investors can easily track the performance of the index and understand the composition of the fund. This transparency helps investors make informed decisions and monitor their investments effectively.

5. Long-term growth potential: The focus on companies with strong financial metrics and growth potential makes index mutual funds tracking the Nifty100 Quality 30 index an attractive option for long-term investors. These funds are designed to provide sustained growth over the long term, making them suitable for investors with a long-term investment horizon.

Cons of investing in index mutual funds tracking the Nifty 100-quality 30 index

All market-linked investments are subject to market risk. We have captured the key risk associated with investing in index funds tracking the Nifty100 Quality 30 index.

1. Limited flexibility: Index mutual funds are designed to replicate the performance of the underlying index. This means that fund managers have limited flexibility to make adjustments based on market conditions. In contrast, actively managed funds can make strategic changes to their portfolios to potentially mitigate losses during market downturns.

2. Risk management: Index mutual funds do not actively manage risk. They simply replicate the index, which means that if the index experiences a decline, the fund will also experience a similar decline. Active fund managers, on the other hand, can implement risk management strategies to protect the fund’s value.

3. Concentration of risk: The Nifty100 Quality 30 index focuses on high-quality companies, but this can also lead to a concentration of risk. If a significant portion of the index is concentrated in a few sectors or companies, any adverse events affecting those sectors or companies can have a substantial impact on the fund’s performance.

3. Lack of exposure to new trends: Index mutual funds tracking the Nifty100 Quality 30 index may not provide exposure to emerging trends or new companies that are not yet part of the index. Actively managed funds have the flexibility to invest in new and promising companies, potentially capturing higher growth opportunities.

Key differences between Nifty 100 and Nifty 100 quality-30 index

Nifty 100 Index and Nifty100 Quality 30 index are two indices launched by National Stock Exchange of India Limited. The key differences between the two indices are as following:

1. Selection criteria

• Nifty 100 index: Companies are selected based on their market capitalisation and liquidity. The index includes the top 100 companies listed on the NSE in terms of market capitalisation.
• Nifty100 Quality 30 index: Companies are selected based on their quality scores, which are calculated using ROE, D/E ratio, and EPS growth. The index includes the top 30 companies from the Nifty 100 Index with the highest quality scores.

2. Focus

• Nifty 100 index: Provides a broad representation of the Indian equity market by including large-cap companies from various sectors.
• Nifty100 Quality 30 index: Focuses on high-quality companies with strong financial performance and growth potential.

3. Weightage

• Nifty 100 index: The weight of each stock in the index is based on its free-float market capitalisation.
• Nifty100 Quality 30 index: The weight of each stock in the index is based on a combination of the stock’s quality score and its free-float market capitalisation.

4. Risk and return

• Nifty 100 index: Offers a diversified portfolio of large-cap companies, which may include both high-performing and underperforming stocks. The risk and return profile is relatively moderate.
• Nifty100 Quality 30 index: Focuses on high-quality companies with strong financial metrics, which may result in lower risk and higher potential returns over the long term.

5. Rebalancing

• Nifty 100 index: The index is reviewed and rebalanced semi-annually to ensure it continues to represent the top 100 companies based on market capitalisation and liquidity.
• Nifty100 Quality 30 index: The index is reviewed and rebalanced semi-annually to ensure it continues to represent the top-quality companies within the Nifty 100 Index.

Performance and returns

Few mutual funds houses in India offer index fund tracking Nifty100 Quality 30 index. Below we have listed the top 2 mutual funds tracking Nifty100 Quality 30 index basis their past 3 year return (CAGR).

Note: All data obtained from AMFI website as of 7th March 2025.

Past returns are not indicative of future performance.

Taxation of index mutual funds tracking Nifty100 Quality 30 index

1. Short-term capital gains (STCG): Short-term capital gains are realised when you sell your mutual fund units within 36 months (3 years) of investment. STCG from equity-oriented mutual funds, including index funds tracking the Nifty100 Quality 30 index, is taxed at a flat rate of 20%.If you invest ₹1,00,000 in an index mutual fund and sell it within a year for ₹1,20,000, the gain of ₹20,000 will be taxed at 15%, resulting in a tax liability of ₹3,000.

2. Long-term capital gains (LTCG): Long-term capital gains are realised when you sell your mutual fund units after holding them for more than 12 months (1 year), LTCG from equity-oriented mutual funds is tax-free up to ₹1.25 lakh in a financial year. Gains exceeding ₹1.25 lakh are taxed at 12.5% without the benefit of indexation. For example, if you invest ₹1,00,000 in an index mutual fund and sell it after 4 years for ₹1,50,000, the gain of ₹50,000 will be tax-free if your total LTCG in that financial year is within ₹1 lakh. If your total LTCG exceeds ₹1 lakh, the excess amount will be taxed at 10%.

Factors to check before investing in an index mutual fund tracking Nifty100 Quality 30 index

1. Expense ratio:The expense ratio represents the annual fee that mutual funds charge their investors to cover the fund’s operating expenses. A lower expense ratio means that a larger portion of your investment is working for you. Compare the expense ratios of different index mutual funds to ensure you are getting the best value for your investment.

2. Tracking error:Tracking error measures how closely the fund’s performance replicates the performance of the underlying index. A lower tracking error indicates that the fund is effectively replicating the index’s performance. Look for funds with minimal tracking errors to ensure that your investment closely follows the Nifty100 Quality 30 index.

3. Fund size (assets under management):The total value of assets managed by the mutual fund. A larger fund size can indicate stability and liquidity. However, extremely large funds may face challenges in replicating the index accurately. Consider the fund size to ensure it aligns with your investment goals.

4. Historical performance:The past performance of the mutual fund. While past performance is not indicative of future results, it can provide insights into the fund’s consistency and reliability. Review the historical performance to gauge how well the fund has performed over different market cycles.

5. Fund manager’s experience:The expertise and track record of the fund manager. An experienced fund manager can effectively manage the fund and make informed decisions. Research the fund manager’s background and experience to ensure they have a proven track record.

6. Investment horizon:The duration for which you plan to stay invested in the mutual fund. Index mutual funds are generally suitable for long-term investments. Ensure that your investment horizon aligns with the fund’s objectives to maximise returns.

7. Risk profile:Understand the risk profile of the fund and assess whether it matches your risk tolerance. The Nifty100 Quality 30 index focuses on high-quality companies, which may offer lower risk compared to other investment options.

8. Tax implications:Be aware of the tax implications of investing in the fund, including short-term and long-term capital gains tax, dividend distribution tax, and securities transaction tax. Understanding the tax implications can help you plan your investments more effectively.

Conclusion

The Nifty100 Quality 30 index is an excellent investment option for those looking to invest in high-quality companies with strong financial performance and growth potential. By focusing on key financial metrics like ROE, D/E ratio, and EPS growth, the index ensures that only the best-performing companies are included, providing investors with a diversified and lower-risk investment option.

Disclaimer: Investing in mutual funds involves risks, including potential loss of principal. Please consult with a financial advisor before making any investment decisions.

Kuvera is a free direct mutual fund investing platform.