Mutual funds: Large & Mid Cap Funds are emerging as an attractive investment option as improving earnings, reasonable valuations and the recent market correction create favourable conditions for long-term investors, according to an internal study by Abakkus Mutual Fund. The study noted that while corporate earnings across large and mid-cap companies have continued to improve, stock prices have lagged, creating a valuation gap that could narrow as market fundamentals strengthen.
The report highlighted that several large-cap and mid-cap stocks have corrected significantly from their all-time highs, while the corresponding indices are trading below their historical average valuations. It said this combination of improving earnings and subdued stock prices has created attractive entry points for investors, with strong fundamentals and attractive valuations potentially supporting mean reversion in select stocks.
Commenting on the findings, Vaibhav Chugh, CEO, Abakkus Mutual Fund, said, “Markets are increasingly rewarding businesses with strong fundamentals rather than broad market participation. Large & Mid Cap Funds offer investors the opportunity to combine the resilience of established market leaders with the growth potential of emerging companies. With valuations becoming more reasonable and earnings outlook improving, we believe the category offers an attractive avenue for long-term wealth creation through disciplined investing.”
According to the study, large-cap and mid-cap companies together account for nearly 79% of India’s listed market capitalisation, based on AMFI data for December 2025. Large-cap companies account for 57% of the market universe, while mid-caps represent 20%, making the category an effective way for investors to participate in India’s long-term growth story.
Why is the recent market correction strengthening the investment case?
Abakkus Mutual Fund believes the recent correction has significantly improved the risk-reward equation for investors. Around 59% of stocks in the Large & Mid Cap universe are currently trading more than 20% below their all-time highs, creating potentially attractive long-term entry points without materially weakening underlying business fundamentals.
The study also highlighted the importance of stock selection. It found that 103 companies, representing around 48% of the Large & Mid Cap universe, have delivered more than 20% CAGR over the past 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.
Can earnings growth drive the next phase of returns?
The study noted that Indian equities are gradually transitioning into an earnings-driven market, making Large & Mid Cap Funds particularly relevant. Since these funds are mandated to invest a minimum of 35% each in large-cap and mid-cap stocks, they offer investors a balanced combination of stability, growth opportunities and diversification.
“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,” Abakkus Mutual Fund said in its study.
Another key finding was the widening gap between earnings growth and stock price performance. Over the past two years, Large & Mid Cap companies delivered earnings growth of 14-16%, while share prices increased by just 1-2%, indicating that valuations have yet to fully reflect improving corporate fundamentals.
The detailed analysis further showed that over the past year, Large Caps recorded EPS growth of 11% despite prices declining 3%, 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%. A similar trend persisted over two years, with Large Caps delivering EPS growth of 7% despite flat price performance, Large & Mid Caps reporting 14% EPS growth against 2% price gains, and Mid Caps posting 22% EPS growth compared with 4% price appreciation.
According to the study, the divergence between earnings and stock prices suggests scope for mean reversion over time, with improving fundamentals likely to support a catch-up in valuations as investors increasingly focus on earnings-driven opportunities.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.