Flexi-cap equity, credit core bets for 2026: Motilal backs 50% large caps

Large caps/hybrids should be considered as portfolio anchors for 2026, complemented by staggered, selective exposure to mid and small caps on the back of improving sentiment

Large cap funds and hybrids should be considered as portfolio anchors for 2026, complemented by staggered, selective exposure to mid and small caps on the back of improving sentiment, said brokerage Motilal Oswal Private Wealth in its latest report.

 

Investors heading into 2026 may need to shift their focus from momentum-driven investing to disciplined, execution-led portfolio building, according to Motilal Oswal Private Wealth.

 

The firm believes India’s market outlook is improving after a consolidation phase in 2025, supported by stronger valuations, early signs of earnings recovery, domestic policy tailwinds and global trade realignments. However, returns in 2026 are likely to be driven less by broad market rallies and more by selective asset allocation and bottom-up investing.

 

 

Motilal Oswal Private Wealth believes that investors should stay true to their Investment Charter, remain neutral on strategic asset allocation, and stay patient through short-term volatility, while being driven by long-term investment objectives. Further to this, Motilal Oswal Private Wealth outlines its recommended strategies across equity, fixed-income, commodities, and real estate:

 

Equity Outlook:

After a consolidation-led year for Indian equities, several headwinds are easing in 2026. With fiscal and monetary measures driving future growth and earnings, the equity outlook remains cautiously constructive.

 

A few announcements in the Union Budget 26-27 may cause near-term volatility, such as high transaction costs and no additional consumption or tax stimulus for demand boost. That being said, the Budget strengthens the core drivers of equity returns through manufacturing incentives, boost for services, capex layout, logistics improvement and asset monetisation.

 

While the large caps are entering the year strong, supported by reasonable valuations and better earnings visibility, the mid and small caps are also presenting good entry point. Budget announcements & trade deals are likely to have a positive impact on the sectors mainly represented in the mid and small cap segment. So, the portfolio focused on such sectors/stocks in mid & small cap space are likely to benefit from the same.

 

As valuations and fundamentals improve selectively, 2026 is likely to reward execution and bottom-up stock selection rather than a broad-based, index-led rebound in the segment. Recommend investors to maintain a neutral view on equities

 

Portfolio Strategy:

 

Indicative allocation – 50% to large caps and hybrids, 40% to mid and small caps, and 10% to global markets.

 

For stability and steady compounding, a balanced approach is recommended. Large caps/hybrids to be a core allocation in portfolios. Complement it with staggered investing over the next 2-3 months in mid and small caps. Prefer index-led or hybrid strategies for large caps and active, focused strategies for mid and small caps.

 

Use lump-sum allocations in hybrid funds at current levels; adopt a staggered SIP/STP approach for pure equity strategies over the next 2-3 months.

 

Fixed income: Credit and accrual strategies to dominate

 

In fixed income, most macro uncertainties appear to be priced in, with benign inflation trends and potential rate cuts creating opportunities for bond investors.

 

Motilal Oswal believes accrual-based credit strategies should form the core of fixed income portfolios, particularly performing credit, private credit investments, infrastructure investment trusts (InvITs), real estate investment trusts (REITs) and non-convertible debentures. Investors should allocate roughly 45–55% of fixed income portfolios to these instruments for holding periods of three to five years.

 

Tactical opportunities may emerge in long-duration government bonds, especially in the 10–15 year maturity segment, where yields currently offer potential capital appreciation alongside steady income. 

Portfolio Strategy:

 

Allocate 45-55% of the fixed income portfolio to performing credit and private credit strategies, selective infrastructure investment trusts (InvITs), real estate investment trusts (REITs), and non-convertible debentures (NCDs) for a minimum period of 3-5 years. InvITs may see some capital appreciation due to softening rates.

 

For shorter holding periods, allocate in relatively liquid fixed income alternative solutions like Arbitrage Funds (three months minimum holding period), Hybrid SIF Funds (minimum two years), and Conservative Equity Savings funds (minimum three years).

 

Consider tactical allocation to long-duration G-Secs (10 /15 year) at yield levels of ~6.8-6.9%/7.1-7.2%), for investors comfortable with duration risk, offering scope for capital appreciation and steady coupon income.

 

Commodities (Gold / Silver) Outlook:

Precious metals delivered exceptional returns, with gold and silver outperforming most assets classes over the past year. Gold’s rally has been largely structural and policy-driven, and we continue to view gold as a strategic portfolio asset amid ongoing fiscal imbalances, currency debasement, and an uncertain monetary policy outlook. Silver’s sharp rally has been driven by structural supply constraints amid rising industrial demand from solar, EVs, and technology, though its higher volatility may warrant a more measured approach in 2026.

 

Portfolio Strategy:

 

Gold: Maintain a neutral asset allocation for portfolio stability, accumulate gradually during market dips for moderate returns over a medium term. 

Silver: Retain exposure to silver in portfolios; consider partial profit-booking for large exposures, and staggered accumulation on corrections for those with no-to-low exposure.

 

Real estate

Portfolio Strategy:

 

REITs offer a more efficient and diversified way to access real estate-linked cash flows – be it commercial, warehouse or data centre. These vehicles provide exposure to income-generating assets with professional management and are supported by SEBI’s framework. Amidst the volatile market outlook, a 5-10% allocation to REITs can help improve portfolio stability and enhance income visibility.

 

According to Ashish Shanker, Managing Director and CEO at Motilal Oswal Private Wealth, the shift from global uncertainty to execution-led growth is likely to define investment returns this year. He emphasised that investors should prioritise stability through large-cap equities and hybrid strategies while gradually building exposure to mid- and small-cap stocks.

 

Motilal Oswal’s strategy report, titled The Daedalus Way, emphasises resisting both market euphoria and excessive pessimism. The firm believes sustainable wealth creation in 2026 will depend on valuation-driven asset allocation, disciplined execution and patience through short-term volatility.

 

"Globally, we have observed markets moving into a phase of normalisation after an extended period of optimism, alongside rising geopolitical risks and moderating AI-led capex momentum. Throughout this period, while tariff-related uncertainties and geopolitical tensions resurfaced, emerging markets showed relative strength, led by China and South Korea. As India heads into 2026, we see key headwinds easing – relative valuations have improved, earnings recovery is gaining traction, AI exuberance is cooling and currency pressures have stabilised. At the same time, domestic policy tailwinds, including interest rate cuts, tax relief to boost consumption, GST slab rationalisation and sustained RBI liquidity support, are expected to translate more meaningfully into growth and earnings. Confidence seems to be coming back in the market after the trade deal with US and signing of EU FTA," said Sandipan Roy, Director, Chief Investment Officer, Motilal Oswal Private Wealth