Large-cap funds regain appeal as investors navigate shifting market dynamics

After a period of investor focus on mid- and small-cap funds, large-cap schemes are making a comeback as analysts highlight their valuation advantage and resilience amid global uncertainties.

Large-cap funds are back in focus as investors reassess whether the recent rush into mid-cap and small-cap schemes has gone too far. Business Standard reported that money has flowed out of large-cap funds in part because investors have chased stronger recent returns elsewhere, while foreign institutional investors have sold heavily in large-cap stocks over the past few quarters, denting sentiment. The Nifty 50’s heavy exposure to financials, oil and gas, information technology and fast-moving consumer goods has also weighed on the category, particularly as IT shares faced weak US demand and concern over artificial intelligence-driven disruption. According to Edelweiss Mutual Fund’s Bharat Lahoti and PGIM India Asset Management’s Abhishek Tiwari, that picture is beginning to improve.

The case for large-cap funds now rests less on excitement and more on valuation and resilience. Lahoti said large-cap valuations, especially in private banks, look more reasonable relative to growth prospects. Tiwari pointed to a shift in foreign flows, noting that foreign institutional investors turned net buyers in July after four months of selling, which could ease one of the main headwinds for the segment. Even so, large caps remain vulnerable to global swings, including crude oil prices and overseas interest-rate moves, which can quickly affect market mood, according to FundsIndia’s Jiral Mehta.

Mid-cap and small-cap funds, by contrast, have benefited from momentum, earnings growth and a broader domestic growth narrative. Lahoti said investors have been attracted by stronger recent performance and better earnings momentum in smaller companies, while many also expect domestic capital expenditure and manufacturing to continue supporting those segments. Reuters has previously noted that this pattern is familiar across market cycles: smaller companies often lead in bull runs, while larger stocks tend to hold up better when conditions deteriorate.

Retail money has also played a major role. Business Standard reported that systematic investment plan inflows hit a four-month high of about ₹31,961 crore in July, with a meaningful share of that money going into mid-cap and small-cap funds. Tiwari said earnings recovery, domestic inflows, reforms and interest-rate cuts could continue to support those categories, but Mehta cautioned that valuations are no longer cheap in parts of the universe.

The risk, advisers say, is that investors let recent returns dictate their portfolio mix. Lahoti said allocations should reflect risk appetite, time horizon and overall goals rather than short-term performance. Large caps remain the stabilising anchor in an equity portfolio, while mid caps and small caps carry higher growth potential but also sharper volatility and deeper drawdown risk. Nitin Agrawal of InCred Money said conservative investors may keep most of their equity money in large caps, while aggressive investors with a genuinely long horizon can hold more in mid and small caps only if they can withstand steep temporary losses without selling in panic.

That is why advisers stress patience and regular rebalancing. Agrawal said large-cap funds ideally need at least three years, with five years more suitable; mid-cap funds should be held for at least five years; and small-cap funds need a minimum seven-year horizon, with 10 years more appropriate. Shweta Rajani of Anand Rathi Wealth said investors should avoid abandoning large caps altogether, because doing so can raise concentration risk and weaken portfolio stability. She also warned that investors already heavy in mid-cap and small-cap funds should include indirect exposure through flexi-cap, multi-cap and value funds, and should rebalance gradually if those categories become too large a share of the portfolio.