Explained: Why are large-cap mutual funds back in demand

Large-cap mutual funds are regaining popularity among investors as market conditions have become volatile and uncertain. The Dalal Street bled for the past six sessions before gaining a little in today’s trading session.

With small-cap and mid-cap stocks experiencing corrections, investors are moving towards large-cap funds, which are considered safer and more stable in volatile times.

“The NSE Small Cap 100 Index is down 20% from its 52-week high, a correction we anticipated in our September and December 2024 newsletters. As expected, a ~10% decline in the broader market has led to a 20% pullback in small caps,” said Equitree Capital.

Broader market corrections have also been severe, with around 60% of companies valued above Rs 1,000 crore seeing their stock prices drop by more than 30%.

During such periods, investors tend to prefer large-cap funds, which focus on well-established companies with strong financials.

Large-cap mutual funds invest in companies with a market capitalisation of over Rs 20,000 crore. These companies are generally more stable, have a strong track record, and are less affected by market fluctuations compared to smaller firms. As a result, large-cap funds are often seen as a safer option for investors seeking steady returns with lower risk.

The recent drop in inflation has also helped improve market sentiment. Inflation eased to a five-month low in January, raising expectations of a potential rate cut by the Reserve Bank of India. Lower inflation and possible rate cuts create a positive environment for large-cap stocks, as these companies benefit from economic stability.

Market analysts suggest that investors who have put money in small-cap and mid-cap funds should review their portfolios. While long-term investors may choose to stay invested in small-cap funds, others may find it wise to shift towards large-cap funds to reduce risk.

According to Sameer Mathur, MD and founder of Roinet Solution, the mutual fund industry in India is expected to grow steadily in 2025 despite global uncertainties. He said that while market ups and downs may continue, India’s strong economic position and investor confidence will keep the industry moving forward. He also advised investors to diversify their portfolios by including large-cap and mid-cap funds instead of focusing only on sectoral or thematic funds.

Experts believe that market corrections often present good investment opportunities. Historically, such corrections have been strong entry points for long-term wealth creation. Investors with a long-term perspective are advised to stay invested rather than trying to time the market.

Equitree Capital believes investors should consider increasing their investments in large-cap funds, taking advantage of the current valuations. They also noted that those who have been waiting on the sidelines should enter the market now, as waiting for the “perfect” moment often results in missed opportunities.

Sanket Prabhu, Director and Head-Wealth, FINHAAT, said, “India being one of the fastest growing economies will reward investors who remain invested for long term but the journey can be painful for short periods like the one we are currently experiencing.”

He added that the strategy for investors having allocation in large cap, flexi cap, multi-cap funds is to add allocation in any dips so that when the current tide turns they are benefited by units bought at lower NAVs.

(Disclaimer: The views, opinions, recommendations, and suggestions expressed by experts/brokerages in this article are their own and do not reflect the views of the India Today Group. It is advisable to consult a qualified broker or financial advisor before making any actual investment or trading choices.)