If you are a new investor and have stayed invested in equities over the past two years, you may have little to show for it. The Nifty 50 is down about 13% over this period and is now 14.5% below its September 2024 peak. Over the past month alone, it has fallen 6.9%. These returns are as of 1 October 2026.
Your mutual fund statements show the same. Over the past month, large-cap funds lost 5.7% on average, mid-cap funds 6% and small-cap funds 3%. Over one and two-year periods, large-cap funds are down about 4% and 7% on average.
After the strong returns markets delivered in the years following the covid-19 pandemic, many investors have been waiting for that run to come back. Instead, two years of flat to negative returns have left them fatigued, and the latest fall has added to the worry. Here is what fund managers say is driving the market, where they see value, and what you should do now.
What is driving the correction
Fund managers cite four factors: higher global yields, expensive crude, worries about the monsoon and continued selling from foreign portfolio investors (FPIs).
"Crude is the more important fundamental factor, along with the concern that higher global yields could signal a turn in the interest-rate cycle," said Neelesh Surana, chief investment officer at Mirae Asset Investment Managers (India). Brent crude has risen about 68% so far in 2026, now trading at $102 per barrel.
Shailesh Bhan, CIO-equity at Nippon India Mutual Fund, said that if crude prices stay higher for longer, inflation and current account deficit challenges will be difficult to manage for India.
India imports most of the crude oil it uses, so a higher oil bill widens the gap between what the country pays for imports and what it earns from exports. This gap has to be funded by foreign capital inflows or RBI's foreign exchange reserves, and a wider gap puts pressure on the rupee.
The rupee, in turn, matters to foreign investors. "Foreign investors assess returns in their own currency. FCNR-B (foreign currency non-resident bank) inflows have helped stabilise the rupee to some extent, but crude moving above $100 a barrel again could raise concerns about the currency if prices remain elevated," said Harsha Upadhyaya, chief investment officer at Kotak Mahindra AMC.
Foreign portfolio investors (FPIs) pulled out ₹35,861 crore ($3.75 billion) from Indian equities in September. Over the past two years, FPIs have net sold close to $60 billion worth of Indian equities, showed data from National Securities Depository Limited (NSDL).
However, fund managers say India's domestic environment remains healthy. "India's high-frequency indicators are holding up, and the earnings season should be reasonably steady," said Alok Singh, CIO at Bank of India Mutual Fund.
Drop in valuations
Fund managers now find the large-cap segment attractive following the fall in valuations. The Nifty 50 trades at about 17 times its one-year forward earnings, which is about 11% below its 10-year average of 18.9 times.
"Over roughly two years, the markets have corrected by 15%, while earnings growth over the same period has compressed price-to-earnings multiples for many stocks by about 30%," said Surana.
Upadhyaya said large caps look cheaper than smaller stocks. "Mid caps are closer to their long-term average valuations. Small caps remain at roughly a 20% premium," he said.
Earnings growth in large caps also seems to be catching up. Large caps reported 17.6% year-on-year earnings growth in the June quarter, Upadhyaya said. Mid- and small-cap companies are growing at about 18–22% but trade at much higher valuations. "If earnings growth becomes similar, investors will need to assess whether the valuation premium is justified," he said.
Singh said investors need to look past the headline P/E. "Even if prices remain unchanged, earnings growth can bring down the P/E multiple. Investors need to consider earnings growth alongside headline P/E multiples," he said.
One way to do this is the price/earnings-to-growth (PEG) ratio, which divides the P/E by the expected annual growth in earnings. A company at 30 times earnings with earnings growing 30% a year has a PEG of 1.
A company at 20 times with 10% growth has a PEG of 2. The first has the higher P/E but costs less for each unit of growth. A PEG below 1 is generally seen as reasonable value.
Singh added that headline index valuations can also mislead. The Nifty 50 Equal Weight index, which gives every stock the same weight, has not corrected as much as the Nifty 50.
He pointed to IT as an example. "They may look attractive compared with historical valuations, but they are not necessarily as attractive on a multiple basis. On a PEG basis, valuations are not below one," he said.
Sectoral outlook
Bhan sees IT as a potential opportunity. Large IT companies trade at about 12–13 times earnings, with earnings yields of 7–8%, he said, and "expectations are low and currency conditions are favourable."
He expects these companies to have a role as businesses try to get value from their AI spending. "As companies and economies seek to realise value from AI investments, IT services companies will have a role, although they will need to re-engineer their business models," he said. He added that large businesses are available at valuations that are, in some cases, lower than those of smaller businesses.
Views on financials, the other large part of the large-cap space, are more positive. Singh expects banking to recover supported by credit growth and the resolution of some liability issues through FCNR deposits.
Bhan said, "Large private-sector banks look sensibly valued from a three-to-four-year perspective. Insurance companies have also corrected, and valuations appear to discount much of the long-term opportunity." He also sees reasonable valuations in some power utilities and consumer companies.
Insurance stocks have corrected sharply after the Insurance Regulatory and Development Authority of India proposed steep cuts to distribution commissions and caps on insurers' management expenses in a consultation paper released on 23 September.
"Currently, the market is very polarised. Sectors with good visibility on earnings are very expensive, making large upsides challenging. Sectors that are cheap have low visibility of good earnings growth," said Viraj Kulkarni, vice-president, equity at Bandhan AMC. Upadhyaya sees value in mega caps, large private banks, insurance and selected consumer companies and is positive on financial services, manufacturing, and pharma and healthcare services.
While most fund managers see more attractive valuations in large caps than in mid and small caps, which have had a stronger run-up barring the recent correction, they also see opportunities in that space.
Surana said several businesses are not represented in the large-cap space, and mid-cap valuations should be viewed in that context. For example, many manufacturing and export-oriented businesses that are less influenced by the monsoon, as well as parts of the capital markets ecosystem, are in the mid- and small-cap space. "Some export-oriented companies could benefit from free-trade agreements and tend to be less exposed to monsoon-related pressures," he said.
"Mid-caps continue to deliver somewhat better earnings growth than large caps, and their valuations have come closer to long-term averages," said Upadhyaya.
Potential triggers
In the near term, fund managers are watching the second-quarter earnings season. "Commodity prices will put some pressure on profit margins, but if revenue growth holds and management commentary stays reasonable, that could support stability," said Surana. He added that high-frequency indicators such as credit growth, GST collections and auto sales have held up reasonably, which augurs well.
According to Bandhan AMC's Kulkarni, "Reversal in oil would mostly result in a tactical bounce. Reversal in AI narrative and significant lowering of US yields will be a structural positive and can result in sustained flows from FIIs."
Upadhyaya expects the effect of a weak monsoon to show up only after two or three quarters and to be limited to certain sectors. He said India could see about two rate hikes in this cycle, but this adjustment looks manageable because the Reserve Bank of India has not allowed interest rates to swing to either extreme.
Takeaways
Fund managers advise against cutting equity exposure; instead, they suggest adding gradually.
Bhan of Nippon summed up the current setup as "bad news and good prices" for Indian stocks. He suggests investors can gradually add to equities. "Risks such as a major global event or disruption from AI need to be managed at the asset-allocation level, rather than only within an equity portfolio," he said.
"Investors need to be patient. Such cycles come in equity markets. If the money was invested in equities for the long term, stick with it. It becomes a problem only if you had put in money you need in the short term. Otherwise, investors may also consider adding to equities as part of their overall asset allocation," said Surya Bhatia, financial adviser at Asset Managers.