With major large cap stocks in green this May, do we invest more in them?

Kolkata: Sharebrokers and holders check the Sensex and Nifty at a Share market in Kolkata on Friday. Domestic equities took a beating amid a global selloff after US President Donald Trump imposed USD 60 billion tariffs on Chinese imports, a move that has

The financial year started off on a positive note, with Nifty 50 and Nifty 100 showing a growth of 4 per cent in April 2023. This momentum continued into May, as major large-cap stocks experienced a remarkable surge. This raises the question of whether investors should consider increasing their allocation to large-cap stocks. Several factors drove the market upwards, and Nifty 50 recorded a growth of 2.8 per cent in May 2023.

The strong GDP growth is one such indicator, with the economy witnessing a robust expansion of 6.1 per cent in the final quarter of FY 23. This growth exceeded market estimates and contributed to the full-year growth of 7.2 per cent for FY 2022-23, surpassing the projected growth of 7 per cent.

The projected economic growth for FY 2023-24 is also encouraging. Both the government and Reserve Bank of India estimate a growth rate of 6.5 per cent, and even conservative International Monetary Fund estimates suggest that India will be the fastest-growing large economy. These projections instil confidence in the market and suggest potential opportunities in the large-cap segment.

Fiscal stability is another factor contributing to the positive market sentiment. Robust tax collections have offset additional subsidy expenditure, ensuring that the fiscal deficit remains within the budgeted estimate of 6.4 per cent of GDP.

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This fiscal prudence adds to the overall stability of the economy and supports investor confidence. Furthermore, strong GST collections reflect a positive trend in the economy. The first two months of the current financial year witnessed a 12 per cent growth in GST collections, highlighting the resilience and strength of the domestic market.

The monetary policy stance of the RBI and the moderation of inflationary pressures have also played a role in shaping the market’s positive trajectory. As inflation eases further in 2023-24, the focus is expected to shift towards growth-oriented policies. This accommodative policy environment can potentially benefit the large-cap segment.

Despite the global economic slowdown, domestic demand conditions remain favourable for growth, particularly driven by investments. While Indian exports may face challenges, the strong domestic demand and investments are expected to support the economy. The external sector has demonstrated resilience, thanks to strong service exports and record inward remittances. These factors contribute to a moderate current account deficit and enhance the external sector’s ability to absorb shocks.

Foreign portfolio investments have also shown positive signs, with foreign investors re-emerging as net buyers of Indian equities. The net buying amounting to $7.5 billion since March 2023 (Rs 63,000 crores) indicates growing investor confidence and interest in the Indian market.

These factors have contributed to the positive market movement, with the Nifty 50 and Nifty 100 Index witnessing substantial gains of 2.8 per cent and 3 per cent, respectively, in the last month. About 37 out of Nifty 50 stocks have delivered positive returns and 10 out of them have delivered returns greater than 10 per cent.

Based on the positive macro developments we are expecting the market to move further up and large caps to simultaneously pick momentum in the coming months.

Should one increase allocation in large caps?

While large caps have regained momentum after a year, it is important to approach portfolio allocation decisions cautiously. As we can see, small-cap and mid-cap both have higher growth potential than Nifty 50 which re-enforces the fact that diversification is required. Considering the upside return potential of all the 3-market cap-based indices, the ideal market cap allocation is recommended as 50 per cent in large caps, 20 per cent in mid-caps, and 30 per cent in small caps.

This allocation strategy is designed to target growth, balance risk and ensure diversification across different market segments; however, this may vary based on your age and liquidity requirement. Apart from considering market cap-based diversification, also look into the asset allocation strategy and allocate funds in low correlated asset classes such as equity and debt and also factor in inflation while considering your goals.

The positive market performance, supported by various favourable factors, suggests that increasing large cap allocation may be worth considering. However, it is crucial to adhere to the principle of maintaining an appropriate market cap allocation aligned with one’s investment goals, risk tolerance, and long-term strategy.

(The writer is the deputy chief executive officer at Anand Rathi Wealth Limited)