Mutual funds strike positive tone on equities as valuations ease

Largecap stocks emerge as contrarian bets as sentiment indicators turn pessimistic and balanced advantage funds raise equity exposure

Mutual funds’ (MFs’) asset allocation and sentiment indicators are increasingly turning positive on equities, particularly largecap stocks, as the market correction improves valuations. 

In a note published on October 15, SBI Mutual Fund said sentiment indicators for largecap stocks had turned “deeply pessimistic”, raising the possibility of a revival in the segment. “With pessimism concentrated in largecaps, the contrarian read suggests conditions may be turning favourable for a largecap revival,” it said. 

The report noted that three-year returns on the Nifty 50 had fallen to a post-2020 low of 6 per cent annually, while the earnings yield-to-bond spread remained narrow and foreign portfolio investors (FPIs) held record short positions in index futures. “Broader market signals offset them: the Sensex-to-BSE 500 market cap ratio is extremely low, earnings revisions have recovered to 53 per cent, and IPO activity remains strong,” the report noted. The asset allocation framework of the fund house favours a 60:40 allocation between domestic equities and fixed income. 

 

ICICI Prudential MF’s “Equity Valuation Indicator” based on September end market data was also close to turning positive on equities. The indicator was at 99.9 level, which forms the border for two different levels — “neutral” and “invest in equities”.  

The favourable stance of MFs on equities is also evident in the net equity exposure of balanced advantage funds (BAF). The equity allocation of most large schemes continues to tread up at the expense of debt securities. HDFC BAF had net equity exposure of over 73 per cent in September, while in the case of ICICI Prudential MF it moderated slightly to 67.2 per cent after hitting a multi-year high of 68.4 per cent in August 2026. 

BAFs dynamically allocate investments between equities and debt, with the mix typically guided by market valuations and the fund manager’s assessment of prevailing conditions.