Amid market volatility, strengthen portfolio resilience with largecap funds

The investment landscape is shifting rapidly as volatile markets and fears of an economic slowdown prompt investors to consider downside risks. Small- and midcap mutual fund schemes dominated investor interest for several years. But in recent months these segments have experienced significant drawdowns. As of January 22, 2025, midcap and smallcap equity schemes had, on average, lost 8.2 per cent each year-to-date, compared to a 4 per cent decline in largecap equity funds.

 

“In an environment of slowing growth and relatively better performance over almost two years of mid- and smallcaps over largecaps, we now prefer large-caps,” says Atul Shinghal, founder and chief executive officer, Scripbox.

 

 

Comfort amid slowing growth

 

The State Bank of India recently revised its FY2025 growth estimate to 6.3 per cent, slightly lower than the 6.4 per cent forecast by the National Statistical Organisation. Foreign portfolio investors (FPIs) sold equities worth Rs 51,748 crore (by January 21, 2025), triggering market volatility. Ongoing third-quarter earnings announcements have also presented a mixed picture.

 

Largecap companies are generally less vulnerable to economic slowdowns than their mid- and smallcap counterparts. Moreover, largecap stocks currently appear attractively valued. “Besides comfort on valuations, if investors believe the Indian economy will grow robustly in future, then it is inevitable that industries and firms within the largecap cohort, like banking, financial services, and insurance (BFSI), consumer-facing sectors, etc. will participate in this journey. The effort should be to align with businesses that can grow profitably,” says Gaurav Misra, head of equity, Mirae Asset Investment Managers (India).

 

Investors need to adopt a disciplined approach. “In periods of high market volatility, investors must maintain a disciplined approach to asset allocation based on their strategic financial goals. If new funds are available for investment with longer time frames, it may be advisable to allocate them to the largecap segment as valuations within this category appear relatively more favourable,” says Chintan Haria, principal investment strategy, ICICI Prudential Mutual Fund (MF).

 

How much to allocate?

 

The proportion of allocation to largecaps can range from moderate to high. “Investors are better off allocating 50-80 per cent to largecap schemes as they provide stability to the portfolio. The allocation to largecaps depends on risk appetite, return objective, investment horizon, and most importantly, the client’s investment experience,” says Shinghal.

 

Misra emphasises the importance of a long-term approach. “The investment horizon for the core large-cap position should be of a long duration, i.e., over three years, to benefit from the underlying structural opportunity and the power of compounding,” he says.

 

Active or passive?

 

Shinghal prefers active funds in the current market climate. “The value which an active fund manager brings to the table is most visible in periods of uncertainty. As we enter a lean market phase, we prefer active funds over passive,” he says.

 

Conservative investors may opt for passive funds. Better still, opt for a mix of the two approaches. “A blend of both active and passive investment strategies is often recommended to capitalise on market efficiencies and potentially hedge against volatility,” says Haria.

 

For those considering passively managed equity schemes, look for options tracking the major indices such as Nifty 50 or Sensex 30, with low expense ratios and minimal tracking errors. While selecting actively managed large-cap equity schemes, consider the fund manager’s long-term track record. Choose a fund house with robust investment processes.