'Buy stocks' - DSP Mutual Fund explains nine reasons why

For midcaps and smallcap stocks, DSP MF advises a more cautious stance or allocation to active managers, with a focus on valuations and quality in a Systematic Investment Plan (SIP) mode.

By Hormaz Fatakia

DSP Mutual Fund has dropped its "conservative" stance on Indian equities and is recommending investors to buy stocks.

The Nifty has corrected nearly 15% from its January highs before this recent two day rebound, and DSP MF believes that there are signs that makes the current correction suitable to add equity allocation in moderate proportions.

Here are some reasons it has highlighted:

Valuations

With the index falling to levels of 22,500 before the recent two-day relief rally, the valuations are now close to long-term averages. DSP MF highlights banks, IT, Healthcare, insurance, housing finance and a few FMCG names are at or below their long-term valuations.

Return Ratios

According to Sahil Kapoor of DSP MF, for several large caps with Return on Equity of 15% to 16% and multiples of less than 17 times, it will make sense to have a suitable allocation to such names, even at the current earnings growth range of 10% to 12%.

"Whenever earnings revive, they can deliver better outcomes than bonds. One can find many of these stocks today," he wrote.

Broader Market Caution

For midcaps and smallcap stocks, DSP MF advises a more cautious stance or allocation to active managers, with a focus on valuations and quality in a Systematic Investment Plan mode.

At the recent lows, the Midcap index was down 13% from its peak, while the Smallcap index had declined more than 20% from its July 2025 highs, entering "bear market" territory.

Bond Yields Factor

The bond yields to earnings yield gap is just 1%. According to DSP MF, this is the ideal zone to own stocks and has become more favourable only during full panic situations like the Covid-19 plunge, or the Global Financial Crisis of 2008.

A Declining VIX

India VIX tested levels of 27 on March 23 and is now declining from those levels, although it still remains close to the mark of 25. This is a sign that there is a reasonable amount of panic, according to DSP MF.

Oversold Markets

Only 15% of the Nifty 500 stocks are trading above their 200-Day Moving Average and 11% are above their 50-DMA. These readings are approaching "extreme" levels although they are not at "extreme" levels yet.

Rupee & Yields

The currency, nearing levels of 94 against the US Dollar, is at "oversold" levels as per the Real Effective Exchange Rate (REER), while the Indian GSec is at a 160 basis points premium to the repo rate, limiting the extent of where rates could be, as per DSP MF.

When To Aggressively Add?

"A time to add aggressively to stocks can come when value starts to emerge in small and midcaps as well. Hence this is a time to raise equity allocation by a notch," the DSP MF note said.