Leveraging Large Cap and Asset Allocation Funds to Combat Market Volatility
“Time For A Diversified Approach – Combine Large Cap And Asset Allocation Funds To Tide Over Volatility,” says Mahesh Patil, CIO, Aditya Birla Sun Life AMC Ltd.
PUNE: As global markets navigate a period of uncertainty, investors are faced with critical decisions on how to deploy their surplus capital amid volatility. The key questions remain: is now the right time to invest? What sectors or asset classes hold the most promise? By analyzing the current landscape through the lenses of fundamentals, technical trends, and liquidity, a clearer picture emerges—one that suggests a cautiously optimistic approach to investing.
Market Fundamentals
The global backdrop remains complex, with the U.S. Federal Reserve maintaining a “hawkish pause” on interest rates. While potential rate cuts in 2025 could ease monetary conditions, a strong U.S. dollar continues to exert pressure on emerging market currencies, including the Indian rupee. However, India’s relative insulation from global tariffs provides a silver lining.
Domestically, India’s economic growth faced a temporary slowdown in early FY25, largely due to fiscal contraction and tight liquidity. However, with fiscal and monetary policies expected to ease, a recovery is on the horizon. GDP growth, printed at 5.4% in Q2 FY25, is projected to reverse to 6.5% by FY26. Moderate corporate earnings growth in FY25 is expected to normalize in FY26, aided by a stabilizing rupee.
Valuations present a mixed picture. While the Nifty’s forward P/E is close to its 10-year average, midcap and smallcap stocks still trade at a premium. A robust ROE of 15.8% for Nifty companies supports a mild valuation premium, reinforcing the case for selective deployment of capital.
Technical Trends
The market has undergone a significant correction, reversing the excesses seen in the post-election rally. The sharp decline in small- and mid-cap (SMID) stocks—where nearly half of NSE 500 stocks fell 30% or more from their peaks—signals a phase of rebalancing. Sentiment indicators, such as the percentage of stocks trading below their 200-day moving average, suggest that markets are approaching oversold levels, historically a signal for a potential rebound.
For the first time since mid-2022, proprietary sentiment indicators have entered the oversold zone, suggesting a buying opportunity for long-term investors. While volatility remains a concern, these indicators point to a near-term trading rally and an improving risk-reward scenario.
Liquidity Trends
FII outflows have been broad-based across emerging markets, not India-specific. With India’s FPI positioning at a decade-low, the likelihood of further outflows appears limited. A stabilizing U.S. dollar could pave the way for renewed inflows.
On the domestic front, SIP flows remain resilient, though lump-sum investors have turned cautious. There is an increasing preference for lower-volatility equity funds over high-risk investments. This suggests a market in transition, where selective and staggered investments could prove beneficial.
Key Market Events: Budget and RBI Policy Impact
The Union Budget 2025, while fiscally conservative, introduced significant consumption-boosting measures, particularly through Rs1 lakh crore in personal income tax benefits. This shift is expected to drive middle-class spending, benefiting sectors such as consumer staples and discretionary goods. Additionally, increased disposable income should support new lending and enhance deposit growth, favoring private banks and consumption-focused lenders.
Meanwhile, RBI’s recent 25-basis-point rate cut signals a shift toward growth support. With further rate cuts expected in 2025, liquidity conditions should improve, offering a supportive backdrop for equity markets.
Investment Outlook: A Time to Deploy with Caution
Despite ongoing volatility, India’s long-term fundamentals remain strong, and much of the market correction appears to be behind us. While near-term risks persist, the improving macroeconomic landscape and supportive policy measures create an opportunity for the gradual deployment of capital.
Long-term investors should consider allocating funds to large-cap and flexi-cap equity funds, given their relative valuation comfort. Sectoral preferences include banking, financial services, digital businesses, and consumer-driven industries. In fixed income, an 8-9% return expectation for 2025 makes it an attractive option for conservative investors. Additionally, gold and silver could deliver 8-12% returns, serving as a hedge against global uncertainty.
For investors looking to navigate the current market environment, a diversified approach is key. Combining core investments in large-cap equities with multi-asset and balanced advantage funds can help manage near-term volatility while positioning portfolios for long-term growth. Market corrections present an opportunity to accumulate assets at attractive valuations—making this a favorable time to deploy capital with a measured, strategic approach.
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