Nifty trading at 18% discount to 10-year average: Is it time to invest in large-cap mutual funds?

Indian equity markets have undergone a sharp correction, bringing large-cap valuations below their historical averages. With the Nifty 50 trading at an 18% discount to its 10-year valuation average, investors may be wondering whether this is an opportunity to increase exposure to large-cap mutual funds.

According to Motilal Oswal Private Wealth's latest Alpha Strategist report, titled The Yellow Signal, the Nifty 50's 12-month forward price-to-earnings (P/E) ratio has declined to 17.2 times, compared with its 10-year average of 20.9 times. The correction has made large-cap stocks relatively attractive, although global uncertainties continue to warrant caution.

Why are large caps looking attractive?

Indian equities witnessed significant selling pressure in September, with the Nifty 50 declining 6.1% to 22,620, marking its second consecutive monthly fall.

The correction was driven by elevated crude oil prices, rising global bond yields, geopolitical tensions and persistent foreign institutional investor (FII) outflows.

FIIs withdrew $4.1 billion from Indian equities during September, while domestic institutional investors invested approximately $8 billion, cushioning the decline.

However, corporate earnings expectations offer some optimism. Nifty 50 earnings are projected to grow 27% year-on-year in Q2FY27, potentially marking the strongest quarterly growth in 17 quarters.

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Should investors shift towards large-cap funds?

Motilal Oswal Private Wealth has increased its preferred allocation to Hybrid and Large Cap strategies to 50%, while reducing Mid and Small Cap exposure to 40%. The remaining 10% allocation continues to be directed towards Global Equities.

The shift reflects relatively reasonable large-cap valuations, while small-cap stocks continue to trade at elevated valuations despite the broader market correction.

Ashish Shanker, MD & CEO, Motilal Oswal Private Wealth, said: "Indian equities therefore appear to be at a ‘Yellow Signal’ - not a reason to stop, but a signal to proceed with greater caution."

For mutual fund investors, this suggests reviewing existing exposure rather than making aggressive portfolio changes. Investors heavily concentrated in mid- and small-cap funds could consider rebalancing towards large-cap or diversified equity funds, depending on their risk appetite and investment horizon.

Nifty valuations and Motilal Oswal's investment outlook

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Why staggered investing matters

Despite attractive valuations, the report maintains a Neutral stance on equities, citing elevated crude prices, global bond yields and geopolitical uncertainty.

Sandipan Roy, CIO, Motilal Oswal Private Wealth, said the opportunity increasingly lies in positioning portfolios with discipline rather than making broad-based allocation calls.

The wealth manager recommends staggered equity deployment, allowing investors to spread purchases across different market levels instead of committing large amounts immediately.

For long-term investors, continuing systematic investment plans (SIPs) in large-cap funds may offer a disciplined way to participate in potential earnings recovery while managing market-timing risks.

However, cheaper valuations do not guarantee immediate gains, and investors should align allocations with their financial goals and risk tolerance.

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