Here’s why large cap stocks are a smart investment choice in FY25

The financial year 2024, ended on a strong note for the domestic equity market. Benchmark indexes Nifty 50 and BSE Sensex offered robust returns to investors, with the former surging 30% and the latter rising 27%. However, financial year 2025 began on a volatile note, followed by an unanticipated general election outcome. This trend was reversed as the new government at the Centre signalled political and policy stability. Additionally, investor sentiment was bolstered by strong domestic macroeconomic data.
Large cap stocks – A prudent choice
With domestic elections out of the way, the focus now shifts to the upcoming elections in several advanced nations in the later part of the year. Investors will also closely watch the priority areas the Government outlines in the upcoming Budget. Given these factors at play, an air of uncertainty persists. Compounding this is the geopolitical uncertainty and the rising crude oil prices – likely resulting in some market volatility through the year. Hence, adopting a large-cap bias within your investment portfolio is a prudent strategy.

Large-cap stocks, known for their stable market positions and lower volatility compared to mid and small cap counterparts, are often seen as reliable investments. Typically comprising mature companies with moderate growth outlooks, these stocks offer consistent returns over time. Investing in large-cap stocks not only mitigates volatility but also provides access to robust competitive advantages, strong cash flows, and other associated benefits. Consequently, they are regarded as safer investment options due to their established market presence and relatively lower risk profile in contrast to smaller companies.
Beware of the froth
Among the various market capitalisations, there is considerable froth in mid and small cap segments of the market– two asset categories which have experienced a dream run in the previous financial year. The recent performance of mid and small-cap indices has been remarkable, with the small-cap index witnessing a staggering rally of nearly 62% and the mid-cap index surging approximately 65% during FY24. Historically, such rapid upward movement in mid and small-cap segments tends to attract a surge of investors, leading to increased liquidity and inflated valuations that could potentially form a bubble. However, bubbles are prone to bursting, triggering substantial sell-offs in these segments.

Recent months have seen a reminiscent scenario unfold in mid and small-cap stocks, echoing events similar to those experienced in 2018. However, this time, the intervention of the Securities and Exchange Board of India (SEBI) prevented the euphoria from spiralling into a crisis. SEBI’s proactive measures, coupled with stress testing conducted by mutual fund schemes on their exposure in mid and small-caps, seemingly averted the possibility of a more severe downturn in these segments, at least for the time being.

Despite the corrective actions taken, analysts remain cautious, deeming valuations in mid and small-cap stocks as still elevated and consequently risky, given that many of these stocks continue to trade at high valuations, potentially detached from their underlying fundamentals. Accordingly, it is believed that at present, large caps offer better valuation comfort as compared to small and midcaps, making them an optimal addition to your portfolio. This is because large caps continue to trade near their long term averages, thereby offering reasonable margin of safety.

Given this background, if you are an investor looking to make fresh equity allocation, then large caps can be an area of consideration. This is an opportunity to accumulate fundamentally strong companies at attractive valuation.

Disclaimer: The article is authored by Vineet Gandhi, Founder at Gandhi Capital Services. The opinions expressed are those of the author and do not necessarily reflect the views of Business Insider India. Do your own research (DYOR) before deciding to invest in any financial asset class. This article is published by the Insider Studios team. You can get in touch with them on insiderstudios@businessinsider.in.