Where should you invest now? Large caps offer best risk-reward, says report

Currently, sectors like IT, Private Banks and Healthcare have become more attractive helped by recent corrections and can be considered relative play compared to broader equity

Bargains In High Quality (High ROE) Cohort. That Is The Opportunity.

Sunainaa Chadha NEW DELHI

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At a time when markets feel uncertain and volatile, a new insight report by DSP Mutual Fund——offers a surprisingly contrarian message: this may actually be a good time to increase equity exposure—selectively and thoughtfully.

The data suggests that while fear is high, valuations are cooling, corporate balance sheets are strong, and long-term return probabilities are improving. But not all parts of the market are equal. Some areas look attractive, while others still demand caution.

One of the most important shifts highlighted in the report is the move from a cautious stance on equities to a more constructive one. This change is backed by data. The Nifty is now trading close to its long-term average valuation multiples, and several large-cap stocks—particularly in sectors such as banking, IT, healthcare and consumer—are available at or below historical valuations. Earnings growth, while not spectacular, remains steady in the 10–12% range, which is sufficient to support equity returns over time. At the same time, the gap between bond yields and earnings yield has narrowed to around 1%, a level that has historically made equities relatively attractive compared to fixed income. These are not conditions associated with market peaks; rather, they resemble early stages of accumulation.

What strengthens this argument further is the condition of the broader market. Market breadth remains weak, with only a small percentage of stocks trading above key moving averages. This indicates that the correction has been widespread and that many stocks are in oversold territory. Historically, such conditions tend to precede periods of better returns, even though they often feel uncomfortable in the moment. Investors typically hesitate to enter markets during these phases because sentiment is negative and uncertainty is high, but that hesitation is often what creates the opportunity.

Here’s what investors should do—and why:

Valuation Reset: Large-cap valuations (with the Nifty at 22,500) have returned to their long-term averages. This provides a much-needed "margin of safety" that was missing in 2025.

The Yield Gap: The gap between bond yields and equity earnings yields is now at just 1%—a level historically seen only during major market panics (like the 2008 crisis or COVID-19). This makes stocks statistically more attractive than bonds for long-term holders.

Sector Divergence: While large caps are becoming "value plays," small and mid-caps (SMIDs) still lack that same margin of safety and require a more cautious, SIP-only approach.

The Investor’s Story: A Strategy for "Smart Recovery"

Imagine your portfolio is a ship that has been idling in safe harbors (cash and hybrids) while waiting out a storm. The DSP report suggests the clouds are parting, but the sea isn't entirely calm yet. Your goal now is to move from defense to "calculated offense."

Where to Allocate: The "Safe Middle" (Large Caps)

Why: The report identifies that over half the market (Banks, IT, Healthcare, Insurance) is trading at or below historical valuation averages. These are "steady compounders" with ROEs of 15-16% but trading at multiples under 17x.

The Move: Increase weightage in Large Cap or Large & Mid Cap funds. These act as your "hiding place" while the broader earnings cycle recovers.

How to Allocate: The "Hybrid Guardrail

Why: Volatility remains high (VIX recently spiked over 25). Equity funds had a rough FY26, with less than half delivering positive returns.

The Move: Use Multi-Asset Allocation or Dynamic Asset Allocation funds. These funds automatically "buy the dip" and "sell the peak" across equity, debt, and gold, taking the emotional guesswork out of your hands

What to Watch: The "Global & Tech" Wildcards

Why: AI is causing "revenue deflation" in traditional IT services (about 2-4% annually), but global AI funding is at record highs.

The Move: Maintain a 10-20% international allocation but avoid chasing "hot" tech themes.

Stick to diversified global funds to hedge against Rupee depreciation and capture the AI-led productivity boom without the concentration risk.

DSP is dropping its conservative stance on equities.

A few signs that make the current correction suitable to add equity allocation in moderate proportions:

1. Valuations, especially for large caps with Nifty Index at 22,500, are now close to long term average. Banks, IT, Healthcare, Insurance, Housing Finance and a few FMCG names(these collectively constitute more than half of market cap) are at or below long-term valuations.

2. For several large caps with ROEs of 15% to 16%, and multiples of less than 17x, even at current earnings growth of 10% to 12%, it would make sense to have suitable allocation. Whenever earnings revive, they can deliver better outcomes than bonds. One can find many of these stocks today.

3. For SMIDs, a more cautious stance is needed or allocation to active managers with focus on valuations and quality is key, in an SIP mode.

4. The bond yield to earnings yield gap is now just 1%. This is an ideal zone to own stocks and has become more favourable only in full blown panics like COVID crash or GFC’08.

5. India VIX went over 25 and has started to recede. This is a sign that there is reasonable amount of panic.

6. Most indices and large cap stocks are at extremely oversold readings. Only 15% of Nifty 500 Index constituent stocks are over 200 day moving average. Only 11% are over 50-day average. These readings are approaching extreme readings, although aren't at extremes yet.

7. Indian Rupee, as per REER, is at an oversold reading.

8. Indian GSec stands at 160 bps premium to repo rate, limiting the extent of where rates could be.

9. A time to add aggressively to stocks can come when value starts to emerge in SMIDs as well. Hence this is a time to raise equity allocation by a notch.

Asset Class View

• Equity: Allocation can be increased by adding Large-caps; Equity underweight positions and fresh lumpsums can be rebalanced / deployed in a staggered manner. Currently, sectors like IT, Private Banks and Healthcare have become more attractive helped by recent corrections and can be considered relative play compared to broader equity.

?-? Mid & Small Caps – allocation can be made via SIPs

• Debt:

Focus on Income Plus Arbitrage for fresh allocation

Funds with higher allocation to longer durations G-Secs can be preferred tactically to benefit from possible rally in yields when macro headwinds subside

• Commodities:

Gold & Silver currently trading at valuations higher than our theoretical framework and lack margin of safety. Not a time to be overweight.

Simple Portfolio Strategy (Based on the report)

For a typical investor:

50–60% → Large-cap / flexi-cap funds

20–30% → Mid-cap (SIP mode)

10–20% → Small-cap (gradual allocation)

Optional → Gold / debt for balance

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First Published: Mar 26 2026 | 3:39 PM IST