For the past two years, one theme has dominated Indian investing: small and mid-caps.
SIP flows poured in. NFOs launched with tailwinds. The narrative became self-reinforcing — small caps outperform, mid-caps outperform, large caps are boring.
The data tells a very different story.
The Market Is Deeply Out of Balance
Foreign investors (FIIs) have sold approximately $32 billion worth of Indian stocks over the last two years. Almost all of it came from large-cap financials and IT. At the same time, domestic money kept piling into small and mid-cap funds.
The result? Nearly half the large-cap index is now trading at valuations not seen in a long time. Meanwhile, the rest of the market has been bid up on domestic momentum.
This is not a small gap. It is a structural dislocation — the kind that has historically corrected, sharply.
And for those who think small caps always win: between 2015 and 2020, large caps returned 13% per year. Small caps returned just 5%. The cycle always turns. The question is whether you are positioned before or after.
Nimish Chandan, CIO at Bajaj Finserv AMC, puts it well in a recent media interaction: large caps have gone through a “time correction” over the past two years and are down roughly 10% from their December 2025 highs. In his view, the phase of overvaluation and earnings cuts is largely behind us. “We are moving out of the storm, not into it”, he says.
Anish Tawakley, CIO at DSP Mutual Fund, in a recent video put out by DSP Mutual Fund, is more direct : a bubble is formed in small caps after a period of momentum-chasing; Large caps, by contrast, offer a far more rational landscape today.
The Earnings Story Is Stronger Than the Headlines Suggest
Read the headlines and you would think Indian companies were struggling — tariff wars, geopolitical tension, a weaker Rupee, relentless FII selling.
But look at the actual numbers. The Nifty 50 grew earnings by 10% year-on-year in Q4 FY26. EBITDA growth across sectors stayed firmly in double digits. Companies raised prices in staple categories without losing customers — a sign of real demand strength, not just inflation.
Looking ahead, Chandan expects Nifty earnings to compound at 12–16% over the next two years. His filter for stock selection: find companies that can grow revenues at twice the rate of India’s GDP. Not just cheap stocks — quality businesses with visible, durable growth.
Large caps did not underperform because their businesses weakened. They underperformed because of selling pressure — two years of relentless FII outflows that had nothing to do with fundamentals.
That kind of sustained selling tends to create a floor, not a freefall.
Why Active Management Matters More Here Than Anywhere Else
Before getting into sectors, it is worth pausing on a question that often goes unasked: if large caps are the opportunity, should you simply buy the index?
Tawakley has a crisp answer — and it is not about fees.
Passive index funds, by design, buy more of a stock as it gets more expensive. As its price rises, its index weight rises, and the fund buys more. A rational investor does the opposite — they get less excited about a stock at ₹200 than they were at ₹100. Index funds cannot make that distinction. Active managers can.
In the large-cap space, Tawakley’s insight is particularly useful: the real opportunity is not finding the next multibagger. It is avoiding the stocks that destroy wealth quietly. Roughly the bottom 30% of the index drags returns for everyone who holds it passively.
His preferred approach: be consistently good rather than occasionally brilliant. A fund that stays in the second quartile of performance every single year will likely end up in the top quartile over five years. Boring? Yes. Effective? Very.
He compares this to fielding in the slips in cricket. You tune out the crowd, ignore the macro noise, and stay completely focused — ready to move the instant the right opportunity appears. Most of the time, you wait. But when the chance comes, you cannot hesitate.
When we met with another well know fund manager- Venkatesh Sanjeevi – earlier this month, his portfolio positioning was unambiguous: 99% invested, with an aggressive tilt toward large caps — the segment the fund manager views as the most mispriced part of the Indian market today.
Chandan echoes this constructiveness, anticipating that “animal spirits” are about to return to equities — potentially triggering a FOMO phase similar to what was recently witnessed in gold and silver.
Here is how conviction is being expressed across sectors.
Banking and Financial Services — The Largest Bet
At roughly 40% portfolio weight at Franklin, banking is the highest-conviction call. Chandan at Bajaj Finserv AMC is similarly positive on the cyclical recovery in private banks. The thesis is not simply that banks are cheap — it is that a specific rotation is underway within the sector.
Large private banks are the beneficiary. HDFC Bank and Kotak Bank — names that once debated valuations of 4x to 4.25x book — are now available at 1.5x book value. These are businesses with strong deposit franchises, established retail networks, and years of compounding earnings power ahead of them.
Consumer and FMCG — The Rotation Is Already Happening
Both the Franklin and Bajaj Finserv managers are aligned here, and the conviction is notable.
After two years of money flowing into infrastructure and industrials, attention is shifting back to consumer and FMCG stocks.
Despite broader uncertainty, companies implemented price increases in staple categories in FY26 without materially denting volumes — a signal of genuine demand resilience, not just inflation-driven revenue growth.
Chandan identifies a “vast array” of 25–30 high-growth consumer companies fuelled by three forces: Indians buying more premium products, rising incomes, and the shift from local kirana stores to organised retail. Nestle and Titan are already attracting strong institutional interest.
On the Franklin side, HUL stands out as a specific turnaround story — a new Indian CEO aligned with global leadership, trading at multi-year low valuations. United Spirits and Marico are also preferred. ITC, despite being cheap, is seen as a slow-growth business — not the kind of compounder you want in a large-cap portfolio.
Cyclicals and Materials — The Underappreciated Angle
Chandan adds a dimension that is not always front-of-mind in large-cap discussions: materials, including ferrous, non-ferrous, and cement, alongside manufacturing exporters who benefit from Rupee depreciation. This is a cyclical recovery play that sits at the intersection of domestic infrastructure demand and global supply chain re-orientation.
Our M2W research adds context: China’s anti-involution policies and power reallocation toward AI data centres are diverting resources away from commodity-intensive sectors, potentially creating favourable conditions for Indian metals and capital goods over the medium term.
The Global Trigger Nobody Is Pricing In
Most retail investors are focused on domestic factors. But there is a global setup building that could accelerate the large-cap re-rating significantly.
The AI investment boom redirected enormous global capital toward the US, Taiwan, and Korea. India’s weight in the MSCI Emerging Markets Index fell from nearly 20% to around 12%. But the AI capex cycle is showing early signs of strain — hyperscalers are funding each other’s spending, supply chains are stretched, and free cash flow is being fully consumed.
When that cycle slows, global fund managers might look for the next destination. India — with a domestic consumption story, compressed valuations, and improving currency dynamics — is the most natural landing spot.
FII selling, in this context, is not a reason to avoid India. It is the very reason large caps are cheap — and it is a precondition for the re-rating that follows.
What Should You Do?
If large caps are underweighted in your portfolio relative to your long-term allocation, this is a structurally sound time to correct that — not because the market is about to rally tomorrow, but because the valuation gap is at an extreme that history does not allow to persist indefinitely.
Prioritise actively managed large-cap funds over passive index products. The case for active selection — particularly avoiding the bottom third of the index — is stronger right now than it has been in years.
This is not a market that rewards momentum or performance chasing. The current environment — marked by FII outflows, compressed large-cap valuations, and domestic flows concentrated in the expensive part of the market — has a historical analogue: 2012–2014, when sentiment toward India was weak, narratives were negative, and long-term opportunities were being quietly assembled.
What worked in that period was not prediction. It was patience, valuation discipline, and the willingness to own quality businesses when no one else wanted them.
Three senior investment professionals — across Franklin, Bajaj Finserv AMC, and DSP Mutual Fund — have arrived at the same broad conclusion through different analytical lenses: large caps are where the value is, the correction has largely run its course, and the setup for the next leg of outperformance is in place.
So, what are you waiting for? If you wish to participate in the largecap story by investing in mutual funds, reach out to Milestones2Wealth.
Sources:
- ithought PMS blog: Large Caps: The Hidden Opportunity for Investors
- ithought PMS blog: India Investment Opportunities: How Did India Perform in FY26 and What Can Investors Expect in FY27?
- ithought PMS blog: Why India’s Large Cap Private Banks Are About to Have a Very Good Quarter
- Franklin Bluechip Fund Manager Meet summary (June 2026) — internal notes