After several rounds of tariffs and counter tariffs, India’s Nifty-50 has corrected by 14 per cent starting from peak in Sep-24 to April 9, 2025. With a recently announced pause in tariffs, the markets recovered 2 per cent on Friday. The short-term outlook will be still clouded by uncertainty about global trade, inflation and growth after the 90-day pause.
Considering the uncertainty and despite the marginal relief rally, investors can consider a small position in Nifty Large-midcap universe through an active fund. The reason for selecting a large-midcap segment is to address the more resilient basket when facing operational volatility while an active fund can be preferred considering the varying degrees of opportunity. While a modest prescription is owing to continued volatility as the last word on tariff is yet to be spoken.
Active management and timing
The stocks in the large-midcap basket, going by the 250 stocks in Nifty Large-midcap index, have corrected by 30 per cent on average from their 52-week high. This includes erstwhile outperformers including, Cochin Shipyard, Tata Motors, Prestige Estates, Rail Vikas, Bharat Forge and Hindustan Zinc falling by around 45-50 per cent from peaks. Even strictly domestic focussed businesses like Motilal Oswal Financial services, Trent, IRB and HUDCO have fallen by around 40 per cent in the recent rout.
Overall, the slide can be attributed to a mix of factors across the board: US operational exposure, high optimism in valuations prior, or general uncertainty.
An active manager would be necessary here to separate the wheat from the chaff in the midst of a broad correction. While a portion of the correction may be justified from a valuation perspective, some others could be at a discount to growth trajectories in the eventual post-tariff world.
Further allocation will be subjective to active managers’ investment style for other stocks like Indigo, Bharti Airtel, HDFC Bank, and cement companies which have been untouched by the rout. An index fund which may “average out” the three categories of stocks may not yield optimally.
The global cues remain foggy, especially with US growth coming under cloud following the trade tariff flip-flops and the possibility of a recession also not being ruled out. Though India cannot be completely immune to these factors, domestic macros are reasonably well-placed. Inflation is under check, the RBI has cut rates while changing its stance to ‘accommodative,’ thus infusing more liquidity into the system, while growth continues to be healthy even if revised to 6.5 per cent for FY26. With the recent budget’s tax relief and the pay commission for government employees set to kick in from 2026, the consumption story could witness a revival.
The healthy correction in the broader markets have brought a semblance of valuation comfort in select mid-cap pockets, apart from a large swathe of large caps. A mix of the two could deliver well over the long term of five-plus years.
Investors can consider a modest lumpsum exposure in the active section of the large-midcap category. Alternatively, an SIP with a long-term perspective can also work well when directed towards saving towards specific goals that are 7-10 years away.
Fund choices
Despite our active recommendation at the moment, the index is a strong performer in the category. Only five of the funds have beaten index on a daily five-year rolling return CAGR average in the past decade and have similar performance across 1 and 3-year formats as well.
The top five active funds over 1, 3, and 5-year categories are listed in the table. Mirae Asset fund has demonstrated a strong performance in the category, and so have Canara Robeco, Quant and Motilal Oswal. Mirae’s five year rolling return CAGR has beaten the index 89 per cent of time in the last decade and has returned 607 bps over the index average. Even during drawdowns, the fund’s lowest point is still 520 bps over the index in the similar time frame. Though Mirae Asset’s recent performance has been lukewarm, its longer term performance has been strong and maintains a less volatile portfolio. Canara Robeco, Motilal Oswal and Quant also have healthy track records.
An SIP in the last ten years would have yielded better returns in Quant fund with an XIRR of 17 per cent followed by ICICI Pru and Mirae fund with returns of around 16.5 per cent. The index SIP would have returned a healthy 15.9 per cent, which is ahead of 78 per cent of the category funds.
The table also indicates improving performance over time, which is true for the equity class. Investors will have to stick to the fund for longer timeframes to achieve a tangible alpha over the index.
Considering the wide disparity in correction and valuations now, and diverse growth trajectories in the post-tariff world, we recommend investors to consider an active fund with a modest lumpsums or SIPs for longer terms in the current phase of correction. Further investments if required will depend on how the current market phase pans out and can be revisited in the future.
Published on April 12, 2025
