Nifty 50 returns have been flat for 2 years. What should investors expect over the next 12 months? DSP mutual fund’s Sahil Kapoor explains

The stock market has left investors with a puzzling question: after two years of largely flat Nifty 50 returns, where is the next leg of growth coming from? With valuations still stretched in parts of the market, global geopolitical risks clouding the outlook and crude oil, interest rates and the rupee adding to the uncertainty, investors are searching for opportunities that offer both growth and a margin of safety. From large caps and private banks to IT, gold and fixed income.
In an interaction with BT, Sahil Kapoor, Executive Director, Investment Strategist and Head of Product at DSP Mutual Fund, weighs in on where investors should look and what they should avoid.

Q). The valuation gap between large caps and small and mid-caps has widened. Where do you see a better risk-reward opportunity for investors today?

Sahil Kapoor: The risk-reward is clearly better in large caps today.  Small- and mid-caps have corrected in time, but not sufficiently in valuation. The median trailing P/E for SMIDs was still around 38 times at the end of August 2026, versus a long-term average closer to 20 times. Large caps, meanwhile, offer a better combination of ROE, balance-sheet quality and similar earnings growth at substantially lower valuations.

The Nifty itself had moved to around 20 times trailing earnings and below 3 times book value by late August. That is not outright cheap, but it is much closer to fair value than it has been for several years.

The interesting development now is that earnings are also beginning to improve. Nifty 50 profits in the latest quarter reached a 10-quarter high. An improvement in sales growth is likely to lead to stronger earnings growth for large caps.
So, I would not make this a large-cap versus SMID debate in absolute terms. There will always be good smaller companies. But at the index level, I would prefer large caps. In SMIDs, I would insist on much greater valuation discipline.

Q). How could the rupee, interest rates and geopolitical developments impact Indian equity markets over the next year?

Sahil Kapoor: For India, the most important geopolitical variable is often not the war itself, but the price of crude oil. Oil prices could become more sensitive to developments in West Asia if the war persists for another six months. Wars have a peculiar persistence. If they drag on for long, they are likely to last even longer. Hence, it is important to watch how much of oil infrastructure comes back online and how much gets impacted by the prolonged conflict.

The rupee closed August at around ₹95.16 to the dollar. The RBI repo rate is 5.25%, while the benchmark 10-year government bond yield has moved back towards 6.9%. Brent crude is again above $90 following renewed fighting in the Gulf. Higher oil can weaken the rupee, increase inflation, raise bond yields and reduce the room available to the RBI to cut rates. It also affects foreign investors because their returns are ultimately measured in dollars.

The other side is equally important. India has just reported real GDP growth of 7.8% and nominal GDP growth of 10.3% for the June quarter. Domestic growth is therefore strong enough to absorb some external stress. A moderately weaker rupee is not necessarily bad for equities, as exporters benefit. The problem begins when currency weakness becomes disorderly and accompanies rising oil, inflation and capital outflows. Hence, I would watch crude more closely than geopolitical headlines. If crude falls materially, the rupee, rates and equity valuations can all get relief simultaneously. If crude remains elevated for a prolonged period, the opposite transmission works.

Q). Gold and silver have delivered strong returns. Should investors continue to hold or add to precious metals, or is the risk of buying after a sharp rally increasing?

Kapoor: There is a big difference between owning gold and buying gold after it has gone up substantially. Gold remains an important portfolio asset. That does not mean every price is a good buying price.

We turned cautious on fresh precious-metal allocation earlier this year, in January. The framework was simple: existing investors could retain a strategic allocation, but this was no longer the place to become aggressively overweight. That caution is even more relevant now. Gold ended August near $4,650 an ounce after rising more than 10% during the month. Silver rose to around $70 an ounce and gained roughly 20% during August.

Interestingly, our July 2025 framework had suggested a broad silver valuation midpoint of around $63. Silver has now moved from being significantly below that framework to being within it. The margin of safety has therefore reduced considerably.

For investors who already own precious metals, I would hold a neutral strategic allocation and rebalance if the weight has become excessive. For somebody entering today, I would avoid a large lump-sum allocation altogether. Price creates narratives.

At $2,000 gold, nobody wanted to discuss the collapse of fiat currencies. At $4,600, everybody does. For now, I would be a fence sitter on precious metals.

Q). The IT sector has seen a sharp decline amid concerns over global growth and AI disruption. Do you see this as a buying opportunity, and what could trigger a recovery in IT stocks?

Kapoor: Yes, selectively. But it is not a simple mean-reversion trade.

The valuation argument for large Indian IT companies has become quite strong. Earlier this year, the largest Nifty IT companies were trading at around 14.5 times trailing earnings, with weighted ROIC above 45%, free-cash-flow yields above 6% and significant cash on their balance sheets. The sector's weight in the Nifty has fallen to roughly 7%, below even the lows around the global financial crisis.

But cheapness does not remove the business risk.

Our July work showed that revenue growth among the top listed Indian IT firms had slowed sharply even as total Indian software-service exports continued to grow. That suggests some business may be shifting towards GCCs and other providers. AI adds another layer of uncertainty. More recently, customers are increasingly asking IT vendors to deliver more output for the same or lower price, shifting contracts towards outcome-based pricing and bringing some AI-enabled work in-house.

I would look for stabilisation in discretionary technology spending, improvement in deal conversion, evidence that AI productivity gains can be shared between the customer and vendor, and eventually a return of hiring. The approach in the sector has to be bottom up.

Q). Major private banks have underperformed the broader market in recent years. What is holding the sector back, and could private banks make a comeback over the next 12 months?

Kapoor: Private banks are one of the more interesting parts of the market.
The problem has not been asset quality. Balance sheets are quite clean. The problem has been the earnings narrative. Deposit costs remained high, earlier rate cuts compressed lending spreads and NIMs came under pressure. At the same time, PSU banks rerated dramatically. The historic valuation premium enjoyed by private banks therefore collapsed.

By March, the large private banks we tracked were trading at roughly 2.1 times book on average, with ROEs around 16%, ROAs around 2% and net NPAs around 0.4%. Their valuation premium over PSU banks had fallen to about 0.9 times, versus a long-term average close to 3 times.

The operating data is now getting more interesting. HDFC Bank's June-quarter loans grew 15.4%, ICICI Bank's advances grew almost 20%, and Axis Bank reported domestic loan growth of around 19%. Asset quality remains healthy. The main pressure remains margins.

Credit growth itself is accelerating across the economy. Financial services GVA grew 12.1% in the June quarter.
For a sustained comeback, we need deposit growth to continue its catch-up, NIMs to bottom and credit costs to remain benign. If that happens, 12-15% credit growth combined with current valuations can be a fairly powerful setup.

Q). Which sectors or investment themes currently offer the best combination of reasonable valuations and earnings growth? Which sectors should investors be cautious about?

Kapoor: I would focus on places where three things overlap: business quality, earnings resilience and reasonable valuations.
Large private banks fit that framework. Select IT companies and cement sector firms also fit it, despite considerable uncertainty around the business cycle. Healthcare remains interesting in patches. Select auto companies also combine good balance sheets, reasonable valuations and earnings growth. There are opportunities in select consumer companies and parts of oil and gas as well.

Q). What I would avoid is confusing a good industry with a good investment.

Our work has repeatedly shown some lower-ROE cyclical sectors trading at very large valuation premiums to their own history. Construction materials, metals, portions of industrials, and several popular capex-related themes have, at various points, traded at multiples that assume unusually strong growth will continue for a very long time.

I would be particularly cautious in parts of defence, power T&D and the broader SMID universe, where the narrative is excellent but the price already discounts much of that narrative. The market currently presents an unusual situation: in some cases, the highest-quality businesses are cheaper than businesses with much weaker economics. That is where I would spend my time.

Q). Given current valuations and market uncertainties, where should investors look for better opportunities over the next 12-18 months: equities, fixed income, gold or cash?

Kapoor: The answer today is more balanced than it was a year ago.

Equity valuations have corrected substantially. We have moved from being cautious on broad equities to gradually adding equity exposure, with a strong preference for large caps and sectors where valuation provides a margin of safety.

Fixed income is also attractive. The 10-year government bond yield has moved back towards 6.9%. That is a visible return before taking equity risk. However, investors should remember that higher oil and inflation have brought rate-hike risk back into the discussion. So, duration should not be treated as a risk-free trade, but as a measured opportunity.

Gold should remain part of a diversified portfolio, but I would be neutral rather than overweight because of the poor margin of safety.

Cash is different. Cash is not an investment thesis. It is optionality. It allows you to buy assets when other investors are forced to sell them.

If I were allocating incremental capital today, I would favour a combination of high-quality large-cap equities and good-quality fixed income. I would maintain, rather than aggressively add to, precious metals. And I would retain enough cash to exploit volatility.

Q). The Nifty 50 has delivered largely flat returns over the past two years. What can investors expect from the index over the next 12 months?

Kapoor: The two years of flat prices have actually improved the outlook. This has largely been a time correction. Earnings and book values continued to grow while the index went nowhere. By July, Nifty's price-to-book ratio had fallen below 3 times for the first time since December 2020, while trailing P/E had moved close to 20 times.

At the same time, earnings are beginning to improve. The latest quarter saw Nifty 50 profits reach a 10-quarter high. India's June-quarter nominal GDP growth of 10.3% also sits almost exactly within the 10-12% nominal growth range that we have used as a broad ceiling for sustainable market revenue growth.

That gives us a useful way of thinking about returns.

Over long periods, equity returns are roughly earnings growth plus or minus the change in valuation.

If Nifty earnings grow around 10-12% and valuations remain where they are, returns can broadly resemble earnings growth. If valuations compress further, returns can be lower. If earnings accelerate and valuations rerate, they can be higher. I do not have a Nifty target for the next 12 months. False precision is particularly dangerous. But the starting point is substantially healthier than it was two years ago.

Investors should tone down expectations from the extraordinary returns of the post-Covid period. Something resembling long-term earnings growth is a much more sensible expectation. The longer this consolidation continues without a collapse in earnings, the better the eventual risk-reward becomes.