The movement in the broader market in recent weeks suggests that it’s time for equity and mutual fund investors in India to start raising their exposure to large-cap stocks and large-cap-oriented mutual fund schemes. Alongside, they should cut back on small and mid-cap stocks and mutual funds.
Many analysts and market experts believe that Dalal Street is now ripe for the next cycle of stock rotation which will largely benefit large-cap stocks, unlike the rally in the last six months that favoured mid and small-cap stocks.
The post-pandemic period has been highly lucrative for equity investors especially those that invest in small and mid-cap stocks. The BSE Mid-Cap index is up more than three times in the last three and half years from around 11,800 at the start of May 2020 to 32,300 currently.
The small-cap index has done even better and it is up three and half times during the period rising from 10,900 in May 2020 to close at around 37,500 on Wednesday. In comparison, the benchmark index BSE Sensex, which is a large-cap index, has just about doubled during the period from around 32,500 in May 2020 to around 66,100 on Wednesday.
The performance gap between the three indices is even more glaring in the first nine months of the current calendar year. The BSE Small Index is up 30 percent since January this year against a 9 percent rally in the Sensex while the mid-cap index is up 28 per cent in the period. This is fully reflected in the performance of equity mutual funds. The small and mid-cap funds have outperformed the large-cap and index funds by a big margin in the last 12 months.
Also Read: Five stock market tips for beginners
The market moves in recent weeks however suggest that large-cap stocks are making a comeback after underperforming for many months now.
The BSE Sensex which tracks the market capitalization of India's top 30 large-cap stocks is up 2 per cent month to date in September so far. In contrast, the Small cap index has been almost flat during the period while the BSE Mid-Cap index is up 3 per cent since the start of September.
Many analysts expect the trend to continue as there is no perceptible difference in the financial performance of large-cap stocks vis-à-vis the mid and small-cap stocks over the longer term. Besides, large-cap stocks are now trading at a valuation discount compared to mid and small-cap stocks.
For example, BSE Sensex is trading at a trailing 12-month price-to-earnings (P/E) multiple of 24.2X, against BSE Mid-cap index trailing P/E of 25.7X and BSE Small Cap index of 29.5X currently. This has made large-cap stocks and mutual funds more attractive compared to mid and small-cap stocks.
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The three market segments move in a cycle and the next cycle could belong to the large-cap stocks. This will favour the large-cap-oriented diversified equity funds. Another winner could be the index funds that track the Sensex, Nifty 50 or Nifty100 index. The best investment strategy would be to pick good quality large-cap funds that have underperformed by a big margin in the last one-year.
The earnings of mid and small-cap stocks also tend to be highly volatile compared to large-cap stocks.
For example, the combined net profit of stocks that are part of the BSE Small Cap index has turned negative in FY19 and FY21 due to the economic slowdown. Similarly, the combined net profit of BSE Mid-cap stocks had declined by 45 per cent year-on-year in FY21 due to Covid-19, but the combined net profit of BSE Sensex stocks was up by 58 per cent in FY21.
The Indian and the world economy once again faces a growth slowdown and this is expected to have a bigger impact on the earnings of mid and small-cap stocks compared to large-cap stocks. Given this equity investors are advised to now look at large-cap stocks and mutual funds more favourably and cut their exposure to mid and small-cap stocks.
(Disclaimer: This article is for information purpose only. Readers are advised to consult a certified financial advisor before making investment in any of the funds or securities mentioned above.)
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).
Also Read: 10 large-cap stocks trading at a discounted valuation
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FAQs
Given the prevailing market volatility, large-cap mutual funds stand out as a compelling option for investors in the mutual fund arena. According to the Association of Mutual Funds in India (AMFI), large-cap companies represent the top 100 firms based on market capitalization.
Should I invest in a large-cap now? ›
In such a scenario, the presence of a large-cap fund in a portfolio can offer some stability. These established companies tend to be less susceptible to market swings and policy changes, making them a good option for equity investors.
Why not invest in large-cap mutual funds? ›
Large-cap growth stocks can be risky. High expectations for future growth may already be built into their stock prices, which means they can fall sharply if they don't meet those expectations.
Should I invest in large-cap or mid-cap mutual funds? ›
Large-cap funds are less risky than small and mid-cap funds. Small and mid-cap funds have higher growth potential than large-cap funds. Large-cap funds are good for conservative investors. Mid and small-cap funds are suitable for medium-risk takers to aggressive investors.
Should I buy mutual funds when the market is down? ›
Nobody can predict the market movements. Hence, instead of focusing on timing the market, one should be disciplined and should keep on investing in equity mutual funds irrespective of the market fluctuations. In the long term, these short term fluctuations do not affect your investments.
Which large-cap fund is best in 2024? ›
List of Large Cap Mutual Funds in India
| Fund Name | Category | 1Y Returns |
|---|
| HDFC Top 100 Fund | Equity | 34.5% |
| Bandhan Large Cap Fund | Equity | 35.9% |
| Edelweiss Large Cap Fund | Equity | 32.6% |
| Invesco India Largecap Fund | Equity | 35.9% |
12 more rowsLow capital appreciation: One of the major drawbacks of large-cap stocks is their limited potential for capital appreciation. Due to their mild response to market fluctuations, the stock values do not go up as much as mid-cap and small-cap stocks during the bullish market.
Do large-cap stocks do well in a recession? ›
Both large- and small-cap stocks have value in one's portfolio. Large-cap stocks are investment mainstays that provide stability and consistency through their size, breadth, and financial resources they can draw on to hedge downturns and sometimes even pay dividends back to their investors.
What are the 10 best stocks to buy right now? ›
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| Company (ticker) | Analysts' consensus recommendation score | Analysts' consensus recommendation |
|---|
| ServiceNow (NOW) | 1.49 | Strong Buy |
| Assurant (AIZ) | 1.50 | Strong Buy |
| Howmet Aerospace (HWM) | 1.50 | Strong Buy |
| Insulet (PODD) | 1.50 | Strong Buy |
21 more rowsYou can expect on an average 15–18 per cent returns on large-cap stocks. Sometimes you may get more than that also. Ideally, to get a good return make sure you remain invested for at least 5 years.
If you are a risk-averse investor but want to benefit from equity investments, then large cap equity funds are the best option available to you.
Should I invest all my money in mutual funds? ›
Given how high the risk is with these mutual funds, it is best to limit yourself to a limited number of small cap mutual funds. Also, avoid putting in a great percentage of your total mutual fund investment in small cap mutual funds. Debt Funds: Ideally 1, but 2 is also good.
Will large-cap continue to outperform? ›
Based on the data in these year-to-date tables through June 10, stocks can continue to outperform and there's no need to expect regression on large caps compared to small caps. Historically, large caps, in these instances, have continued their outperformance versus small caps.
When to invest in large-cap mutual funds? ›
Large Cap should be a choice for those individuals who need to make good use of equity investments but don't need their returns to keep on fluctuating with time. Since large-cap funds are known to be financially stable, they are capable of withstanding bear markets.
What percentage of investments should be in large-cap? ›
The conservative allocation is composed of 15% large-cap stocks, 5% international stocks, 50% bonds and 30% cash investments.
Is it wise to invest in mutual funds now? ›
Treat an investment journey as a marathon, not a sprint. Long-term and equity mutual funds are ideal products to create wealth if you follow two mantras for investment: the best time to invest is now, and the best way to invest is regularly—in other words, every month.
Should I invest in mid-cap funds now? ›
This is what makes investing in mid cap companies risky. Being a mutual fund investor, you cannot overlook these aspects of investing in mid cap companies. You should invest in these schemes only if you have very high risk tolerance. You should also have a longer investment horizon of, say, seven to 10 years.
When should I invest in small-cap vs large-cap? ›
If you have a greater risk tolerance and longer time horizons, small-cap stocks tend to outperform big-caps over time because they are able to grow more rapidly than larger companies. If you prefer stable appreciation and dividend income, big-caps may be more suitable.
What is the risk in large-cap mutual funds? ›
Whether to invest in large-cap or mid-cap funds depends on individual risk tolerance, investment goals, and time horizon. Large-cap funds offer stability and lower volatility, suitable for conservative investors, while mid-cap funds provide higher growth potential but with increased risk.
