Nifty 50 correction: why fund managers see more value in large caps now

Summary

Two years of flat market returns and sharp oil-led corrections have dragged Nifty 50 valuations below historical averages. Fund managers explain why beaten-down blue chips offer a margin of safety and where to invest now.

If you are a new investor and have stayed invested in equities over the past two years, you may have little to show for it. The Nifty 50 is down about 13% over this period and is now 14.5% below its September 2024 peak. Over the past month alone, it has fallen 6.9%. These returns are as of 1 October 2026.

Your mutual fund statements show the same. Over the past month, large-cap funds lost 5.7% on average, mid-cap funds 6% and small-cap funds 3%. Over one and two-year periods, large-cap funds are down about 4% and 7% on average.

After the strong returns markets delivered in the years following the covid-19 pandemic, many investors have been waiting for that run to come back. Instead, two years of flat to negative returns have left them fatigued, and the latest fall has added to the worry. Here is what fund managers say is driving the market, where they see value, and what you should do now.

What is driving the correction

Fund managers cite four factors: higher global yields, expensive crude, worries about the monsoon and continued selling from foreign portfolio investors (FPIs).

"Crude is the more important fundamental factor, along with the concern that higher global yields could signal a turn in the interest-rate cycle," said Neelesh Surana, chief investment officer at Mirae Asset Investment Managers (India). Brent crude has risen about 68% so far in 2026, now trading at $102 per barrel.

Shailesh Bhan, CIO-equity at Nippon India Mutual Fund, said that if crude prices stay higher for longer, inflation and current account deficit challenges will be difficult to manage for India.

India imports most of the crude oil it uses, so a higher oil bill widens the gap between what the country pays for imports and what it earns from exports. This gap has to be funded by foreign capital inflows or RBI's foreign exchange reserves, and a wider gap puts pressure on the rupee.

The rupee, in turn, matters to foreign investors. "Foreign investors assess returns in their own currency. FCNR-B (foreign currency non-resident bank) inflows have helped stabilise the rupee to some extent, but crude moving above $100 a barrel again could raise concerns about the currency if prices remain elevated," said Harsha Upadhyaya, chief investment officer at Kotak Mahindra AMC.

Foreign portfolio investors (FPIs) pulled out ₹35,861 crore ($3.75 billion) from Indian equities in September. Over the past two years, FPIs have net sold close to $60 billion worth of Indian equities, showed data from National Securities Depository Limited (NSDL).

However, fund managers say India's domestic environment remains healthy. "India's high-frequency indicators are holding up, and the earnings season should be reasonably steady," said Alok Singh, CIO at Bank of India Mutual Fund.

Drop in valuations

Fund managers now find the large-cap segment attractive following the fall in valuations. The Nifty 50 trades at about 17 times its one-year forward earnings, which is about 11% below its 10-year average of 18.9 times.

"Over roughly two years, the markets have corrected by 15%, while earnings growth over the same period has compressed price-to-earnings multiples for many stocks by about 30%," said Surana.

Upadhyaya said large caps look cheaper than smaller stocks. "Mid caps are closer to their long-term average valuations. Small caps remain at roughly a 20% premium," he said.