Indian benchmark indices are down about 10-11% this calendar year owing to several factors such as the West Asia war and the resultant rise in oil prices, the weak rupee, and global capital chasing the AI theme.
Foreign institutional investors (FIIs) have sold over $30 billion worth of Indian equities so far this year (as of 11 June). As foreign ownership is concentrated in large caps, that segment has absorbed most of the selling pressure. This fund managers said, has created an opportunity in large cap stocks.
“Many high-quality businesses are trading at valuations that appear to reflect sustained technical FII selling pressure rather than any deterioration in underlying fundamentals,” said Neelesh Surana, chief investment officer, Mirae Asset Mutual Fund.
Rajat Chandak, senior fund manager at ICICI Prudential Mutual Fund said, "The Nifty 50 is trading around 16-18 times one-year forward earnings, which is broadly in line with its historical averages and only marginally above long-term mean valuations.”
Euphoria cools
Sailesh Raj Bhan, chief investment officer, equities, Nippon India Mutual Fund, said, "The market has gone through nearly two-and-a-half years of consolidation and many of the excesses that had built up earlier are gradually getting corrected.”
“Earnings growth has started improving from the third and fourth quarters (of FY26) onward, with tax relief measures and improving domestic demand expected to support earnings over time,” he added.
Abhinav Sharma, fund manager at Tata Mutual Fund, said, “At the Nifty 50 level, earnings growth for FY26 was close to 8%, which was actually better than what we saw in FY25. Looking ahead to FY27, while current consensus earnings growth estimates are 16-17%, this is subject to the uncertainties arising from the ongoing West Asia conflict. A prolonged conflict may lead to some cut in these earning growth estimates, but we do expect FY27 earnings growth to be better than FY26."
Another argument in favour of large caps is that they can provide stability in the current environment. "Large-caps have offered stability despite volatility across broader markets," said Aniruddha Naha, chief investment officer, alternates, PGIM India Asset Management Company. ASK Investment Managers made a similar point in its June outlook note, saying it continues to prefer large caps for their "stronger balance sheets, deeper liquidity and better earnings visibility”.
"Our approach has been to use periods of uncertainty and market consolidation to accumulate quality businesses for the next three to five years," said Bhan of Nippon India MF.
Most attractive sectors
Private banks and information technology (IT) have seen the heaviest FII selling, according to an ASK Investment Managers note. "Several leading private-sector banks are available at valuations of around 1.5 times price-to-book despite having high-quality franchises and strong balance sheets," said Bhan.
Chandak of ICICI Prudential MF said he expects bank earnings growth to accelerate from last year's subdued 3-5% to the mid-teens, with credit growth holding in the 12-14% range. The ASK note echoed this: "From low bad loans to clean balance sheets and robust credit growth to valuation comfort—banks are witnessing multiple tailwinds.”
On IT, Bhan said stock prices appear to have already priced in concerns. "Even if growth remains muted for a period, several leading IT companies are available at earnings yields of around 6-7%. In addition, a weaker rupee provides a supportive tailwind for earnings," he said, noting that the IT industry navigated several technology shifts in the past.
According to Chandak, Indian IT firms could gain in either AI scenario. If hyperscaler investments fail to generate adequate returns and the AI buildout slows, disruption concerns ease for traditional IT services. If adoption expands instead, "enterprises will eventually need help implementing AI models, agents and workflows at scale. This is where software services companies can play an important role as system integrators," he said.
Many IT names, he added, offer dividend yields of 6-7% and free cash flow yields of 10-11%, which provide "a reasonable margin of safety while investors wait for the next triggers of growth to emerge”.
What should investors do?
Fund managers are positive on large caps, but there is no certainty on whether or when their thesis will play out. "Even a moderation in FII outflows should alleviate downward price pressure on many large caps. Over time, this may catalyze a re-rating of valuation multiples — though the precise timing remains difficult to call,” said Surana.
However, actively managed large cap funds have struggled to beat their benchmarks at times, so low-cost index funds tracking the Nifty 50 or Nifty 100 could also be considered.
Flexi cap funds are another option for investors seeking some exposure to mid and small caps, apart from large caps. “As global uncertainty remains, including the new threat of El Nino, a well-managed flexi cap fund can offer the stability of large caps and the potential growth of mid and small caps,” said Trideep Bhattacharya, chief investment officer, equities, Edelweiss Mutual Fund.
Large cap funds are required to maintain minimum 80% allocation to large caps at all times, while flexi cap funds can dynamically move across large caps, mid caps and small caps without any restrictions.