According to an internal study by Abakkus Mutual Fund, large and mid-cap funds are emerging as attractive investment opportunities amid improving corporate earnings and relatively lower valuations. The study reveals that nearly 59% of stocks in the large and mid-cap universe are currently trading more than 20% below their all-time highs, potentially creating attractive entry points for investors. Large-cap and mid-cap indices are trading below their historical average valuations despite improving earnings growth, as reported by Abakkus Mutual Fund. The current market environment strengthens the investment case, with around 59% of stocks in the Large & Mid Cap universe trading more than 20% below their all-time highs following recent market corrections, creating compelling entry points for long-term investments. As Indian equity markets transition into an earnings-driven phase, Large & Mid Cap Funds are emerging as an attractive investment category, offering investors a balanced combination of potential stability along with growth opportunities and diversification.
The study identified a significant divergence between earnings growth and stock price performance across market segments. Over the past two years, companies in the Large & Mid Cap universe recorded earnings growth of 14-16%, while stock prices rose by only 1-2%. This substantial gap between earnings performance and market valuations could create scope for catch-up in stock prices as corporate earnings continue to improve. The study further highlights that stock selection will be the key differentiator in the coming years, with nearly 103 companies, representing around 48% of the Large & Mid Cap universe, having delivered more than 20% CAGR over the last five years. Among large-cap stocks, 11 companies generated returns exceeding 40% CAGR, while 19 mid-cap companies crossed the same milestone, underscoring the significant variation in returns across the investment universe and reinforcing the importance of active fund management. The divergence suggests potential scope for mean reversion, with stock prices likely to catch up with underlying earnings over time, reinforcing the importance of active fund management and disciplined stock selection.
According to Edelweiss CIO Trideep Bhattacharya, largecap funds may be losing their traditional edge due to structural market share shifts to nimbler competitors. He favours flexicap and midcap funds as the optimal vehicle for modern wealth creation, blending stable leaders with high-growth challengers. As per Edelweiss, some largecap business models are seeing structural market share losses, which can be complemented by mid and small cap stocks that make up a good portfolio from a wealth creation standpoint. The midcap segment is positioned as the best play India has on the earnings upgrade story, with category exposure concentrated in high-growth areas such as hospitals, capital markets, defence, and industrial exports. These sectors are fundamentally underpenetrated in India and are seeing structurally higher growth rates, making them the categories of the future. A combination of flexicap and midcap funds covers the entire market quite nicely, offering investors the opportunity to combine resilience of established market leaders with growth potential of emerging companies.
The recent market correction has significantly improved the risk-reward equation for investors in large and mid-cap funds. As per Abakkus Mutual Fund, the correction has created attractive entry points without materially weakening underlying business fundamentals. Large Caps recorded EPS growth of 11% despite prices declining 3% over the past year, while Large & Mid Caps reported EPS growth of 15% against price gains of just 1%. Mid Caps posted EPS growth of 26% compared with price appreciation of 5% over the same period. Over two years, Large Caps delivered EPS growth of 7% despite flat price performance, Large & Mid Caps reported 14% EPS growth against 2% price gains, and Mid Caps posted 22% EPS growth compared with 4% price appreciation. These trends indicate that valuations have yet to fully reflect improving corporate fundamentals, suggesting scope for mean reversion as markets increasingly focus on earnings-driven opportunities.
Large and mid-cap funds are mandated to invest at least 35% each in large-cap and mid-cap stocks, allowing investors to combine the relative stability of established companies with the growth potential of emerging businesses. According to Vaibhav Chugh, Chief Executive Officer of Abakkus Mutual Fund, markets are increasingly rewarding companies with strong fundamentals over broad-based market participation. He noted that improving earnings prospects and relatively attractive valuations make the category well placed for long-term investors, as reported by Abakkus Mutual Fund. At Abakkus Mutual Fund, all investment decisions are guided by the proprietary MEETS framework, which evaluates businesses based on Management quality, Earnings strength, Events and industry trends, Timing of investments at reasonable valuations and Structural growth opportunities. This disciplined, research-driven investment philosophy seeks to identify high-quality businesses capable of creating sustainable long-term wealth across market cycles, with the category offering investors the opportunity to combine resilience of established market leaders with growth potential of emerging companies.
