Large caps turn attractive as valuations ease; caution on mid, small caps: DSP MF

New Delhi [India], April 18 : Indian equities may be entering a more constructive phase after recent corrections, with improving valuations and multiple contrarian indicators signalling potential upside, according to the latest market outlook report by DSP Mutual Fund.

The report highlights that benchmark indices are now trading closer to historical averages, creating a more favourable entry point for investors. "Valuations are now between fair and average. It is prudent to start raising equity weights while the market is falling and moving closer to fair value," the report noted.

Market sentiment has remained weak amid sustained corrections, but this has also triggered several bullish signals. Volatility indicators, oversold conditions, and rare streaks of declines suggest improving forward return probabilities. Historically, extended drawdowns have often preceded strong recoveries, reinforcing the case for gradual allocation.

The outlook is particularly constructive on large-cap stocks, where valuations have corrected meaningfully. According to the report, "Large caps have become much more attractive, not only in terms of price levels, but also because the large-cap cohort offers much better ROEs and a similar earnings trajectory."

In contrast, caution is advised in the small- and mid-cap segments, where valuations, though moderating, remain elevated relative to long-term averages. The report recommends selective exposure via active management strategies focused on quality and valuations.

On benchmark trends, the fund house said the Nifty's valuation metrics have moderated significantly. "The Nifty's trailing price-to-earnings multiple has fallen below 20x... around its long-term average of 18.9x," it said.

However, it clarified that markets are not outright cheap yet. "Is 18.9x cheap? Not really... the index is between fair and average valuations," the report said.

Despite this, DSP Mutual Fund believes the current phase offers a good opportunity to gradually increase equity allocation. "It is prudent to start raising equity weights while the market is falling and moving closer to fair value," it added.

The broader message for investors is behavioural discipline during volatile phases. "Panic-selling days should be used to add to equity exposure," the report emphasised, noting that fear-driven markets often create opportunities for long-term investors.

Overall, the report suggests a calibrated increase in equity exposure, with a bias toward high-quality large-cap names, while maintaining a measured approach to broader markets.

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