Stock market: How to invest Rs 5 lakh in this market as midcaps, smallcaps outdo largecaps

At a time when global markets are grappling with geopolitical tensions, second-rung stocks on Dalal Street have outperformed the blue-chip stocks in the ongoing financial year. Take this: The BSE Smallcap and Midcap indices rallied 15% and 11%, respectively, since April 1, 2025. On the other hand, the BSE Sensex gained nearly 6% during the same period. Sector-wise, the BSE Realty index has gained the most, 20%. It was followed by the BSE Telecom index (up 13.5%), Capital Goods (up 12%), and Auto (up 10%). So, what to expect from markets now? How can investors position their portfolio in this market? And which sectors will outperform from here onwards? In an interaction with Business Today, Vipul Bhowar, Senior Director, Head of Equities at Waterfield Advisors, shared her insights. Edited excerpts:
 

BT: Which factors have been driving the broader markets this financial year?

Bhowar: The Midcap and Smallcap indices have bounced back from the decline they faced in September 2024. In previous years, mid and small-cap stocks rose sharply, leading to valuations perceived as excessive compared to earnings growth. Now, with valuations appearing more appealing next to large caps, earnings recovery, enhanced sentiment in both global and domestic markets, steady inflows from foreign and domestic investors, and favourable trade and geopolitical events are contributing to this rebound.
 

BT: How do you see the market trend in the coming months?

Bhowar: The outlook is confidently optimistic, fuelled by a strong domestic economic recovery and robust growth in specific sectors, even amidst global uncertainties. A significant rebound is expected after the anticipated slowdown in 2024, which is currently influenced by weak consumption and muted global demand. However, clear signs of stabilisation are emerging, demonstrated by an uptick in credit growth, industrial production, and government capital expenditure.
 

BT: Considering the present market environment, how should an investor build a portfolio with Rs 5 lakh?

Bhowar: An investor aiming to create a portfolio with Rs 5 lakh should prioritise diversification, risk tolerance, and investment timeline. For an investor with an aggressive (high risk) profile, the proposed allocation strategy is as follows: 70% allocated to equities: 50% to large caps and 25% each to mid and small caps; 10% for REIT/INVT, divided equally; 5% in gold, serving as a hedge against equities; 2.5% in silver, considered more of a tactical investment and 12.5% should be kept in a combination of liquid/arbitrage and fixed deposits. I would suggest considering a staggered approach to investing in equities. This method can help manage risk and optimise potential returns over time.
 

BT: Which sectors do you believe have the potential to generate robust wealth over the next three years?

Bhowar: Several sectors and themes in India have significant potential for wealth generation, driven by prevailing growth trends and strategic government initiatives. Financialisation: Trends in wealth management, asset management, and participation in capital markets are expanding. Manufacturing and Defence: Initiatives such as ‘Make in India’ and Atmanirbhar Bharat are propelling advancements in the manufacturing and defence sectors. These areas are expected to continue growing, driven by government support and improved export capabilities. Healthcare and Pharmaceuticals: The healthcare and pharmaceutical sectors are witnessing growth fuelled by heightened health awareness, increased medical tourism, and the expansion of pharmaceutical exports. Travel and tourism: Rising income levels and urbanisation are contributing to a fundamental shift in travel behaviour, wherein air travel is evolving into a necessity rather than a luxury. Moreover, the combination of supply constraints and increasing demand is creating a disparity in the market, leading to elevated occupancy and room rates, which subsequently enhance average room revenues (ARRs) across the industry.

Consequently, investors who concentrate on these sectors while adopting a diversified investment approach are well-positioned to capitalise on substantial wealth-creation opportunities in India over the next three years.
 

BT: Could you suggest a few stocks that investors can consider holding for the next three years?

Bhowar: I would not recommend specific individual stock ideas. Instead, I advocate for a diversified portfolio approach, comprising 15 to 20 different businesses. This strategy can help mitigate risks and enhance overall investment performance.
 

BT: What are your key takeaways from the Q4FY25 earnings season? What are your expectations from Q1FY26 results?

Bhowar: The Q4 FY25 results exceeded expectations, indicating a positive trend. A notable observation is that while the broad-based rally has shifted, earnings are becoming more concentrated in specific sectors and businesses. This presents an opportunity for companies to sharpen their focus on operational efficiencies, embrace AI technologies, and drive product-led growth to sustain their momentum moving forward.
 

Corporate earnings are anticipated to exhibit improvement commencing in the first quarter of fiscal year 2026, as the base effect diminishes. Key sectors, including consumer goods, private banking, insurance, telecommunications, pharmaceuticals, and cement, are projected to achieve annual earnings growth ranging from 10% to 15%. This growth is expected to be underpinned by steady demand and effective cost management strategies.
 

BT: What are the potential risks or headwinds that could weigh on the domestic equity markets going forward?

Bhowar: The Indian equity markets are facing a mix of earnings challenges, valuation concerns, geopolitical tensions, global trade uncertainties, a cyclical economic slowdown, and narrowing earnings, which could negatively impact performance in the near to medium term.
 

BT: Real estate stocks have performed well in FY26 so far. What are the key drivers behind this rally, and do you believe the momentum is sustainable?

Bhowar: The financial year 2026 budget has enhanced disposable incomes by increasing income tax exemption limits, making the ownership of multiple homes more tax- efficient, and allocating Rs 15,000 crore to the Special Window for Affordable and Mid- Income Housing (SWAMIH) fund to complete stalled housing projects. Furthermore, monetary easing and reductions in interest rates have improved affordability and financing conditions for both homebuyers and developers. These developments have collectively contributed to a rally in real estate stocks. The momentum appears to be sustainable in the near term, underpinned by structural growth drivers.