Indian Markets are Strong but are Investors Strong ?

Pahalgam Terror Attack, India-Pakistan War, Iran-Israel War, Trade War, Slowdown of the U.S. economy getting reflected- all these events were not able to bring down the markets as compared to what they did during September 2024 to March 2025. The market made a turnaround from the 2^nd week of March 2025. The interesting part is that we often get carried away, and our memories are short lived hence we forget how your portfolio of investments has gone through so many events. We attract eyes to negative performance but ignore the ones who fell the least and survived during these major events. Investors are not as strong as compared to the Indian markets. Panic redemptions, panic Debt investments, and stoppage of SIPs are all acts of investors' weakness. Despite so much financial education, the myopic vision of the investors cannot be ruled out. Indian investors are now having less patience compared in the previous decade. This is the perfect recipe for wealth destruction.

 In my recent interactions, I still find investors cautious and have a negative outlook on the mid-cap and small-cap space. Many investors are busy comparing the returns of the index with their Mutual fund portfolio or schemes. One of the biggest blunders of comparison where an active portfolio does not carry a mirror image of the index portfolio. We are lost in the world of returns and investments.

India’s equity markets have showcased remarkable strength through the first half of 2025, reflecting investor optimism, robust liquidity, and economic momentum. Market participation has been broad-based, spanning across large-cap, mid-cap, small-cap, and micro-cap segments. A closer look at the performance and valuation data of key indices from March 1, 2025, to the present reveals important insights for investors as they plan their strategies for the rest of the year.

The market's recovery has been bolstered by strong domestic institutional and retail investor participation. Despite foreign portfolio investor (FPI) outflows of $11 billion in October 2024, the Nifty 50 only corrected by 6.2%, supported by domestic investors. Retail participation has surged, with investor accounts growing from 4.9 crore in FY20 to 13.2 crore by December 2024, and net investments of ₹4.4 lakh crore in the NSE cash segment from 2020-2024.

Systematic Investment Plan (SIP) inflows hit a record ₹253.2 billion, up 49.6% year-on-year, cushioning the market against FPI selling.  Investor participation has been a contributor, with the number of investors growing from 4.9 crore in FY20 to 13.2 crore as of December 31, 2024.

Market Performance: A Strong Run for Smaller Segments

Leading the rally, the Nifty Small Cap 250 TRI posted an impressive 27.32% return since March 2025. Close behind were the Nifty Micro Cap 250 TRI, which surged 23.61%, and the Nifty Mid Cap 150 TRI, returning 22.54%. Even the broader Nifty 500 TRI delivered a robust 18.52%, while the Nifty 50 TRI, representing India’s largest companies, grew 15.88% over the same period.

Despite these strong gains, most indices remain marginally below their 52-week highs, with the correction from peak levels ranging from -2.49% to -10.10%. This indicates that while optimism persists, valuations and market psychology remain slightly tempered, suggesting a potential for continued growth if supported by earnings momentum and macroeconomic stability.

Valuation Dynamics: A Mixed Bag Across Market Caps

The current valuation picture reveals contrasting signals across segments. Using the price-to-earnings (P/E) ratio as a gauge, certain segments offer value, while others may be showing signs of overheating.

Among large caps, Nifty 50 TRI trades at a P/E of 23.00, which is 7.26% below its 5-year average and 5.66% below its 52-week high P/E. This suggests relative valuation comfort for long-term investors seeking stability and consistent returns.

Interestingly, the Nifty Mid Cap 150 TRI, with a P/E of 34.90, is trading at a 32.19% discount to its 5-year average P/E and a 23.80% discount from its peak P/E. Despite the higher absolute P/E, this historical undervaluation hints at promising opportunities for investors with a medium-term view.

On the other hand, Nifty Small Cap 250 TRI is trading at a P/E of 33.50, reflecting a 14.96% premium over its 5-year average and a 6.72% premium over its recent peak. This suggests a potentially overheated zone that demands caution and careful stock selection. Similarly, Nifty Micro Cap 250 TRI stands out for its volatility: although currently undervalued with a 26.39% discount to its 5-year average P/E, it remains 10.10% below its 52-week high, underlining the risk of instability in this space.

1-Year Return Perspective: Large Caps Still Shine

While small and mid-caps have surged more recently, a 1-year performance view places the Nifty 50 TRI on top with an 8.16% return, ahead of the small-cap and micro-cap indices. This trend underscores the steady resilience of large-cap stocks, especially during volatile or uncertain times. Small-cap and micro-cap returns over the same period were more muted, likely reflecting their already elevated valuations at the start of the year and the subsequent correction that followed.

Strategic Investment Insights

The performance and valuation data reveal differentiated opportunities across market caps. For conservative investors, large caps such as those in the Nifty 50 and Nifty 500 offer the most compelling mix of valuation comfort and stable earnings visibility. Yes, large cap is now for the defensive investing category for the market and not for aggressive equity investors. Gone are the days of large caps becoming multibaggers.

 For moderate-risk investors, mid-caps—particularly the Nifty Mid Cap 150—are trading at attractive discounts, suggesting long-term entry opportunities.

Small caps, while delivering strong returns, are currently priced at a premium. This requires a more selective, bottom-up approach with a focus on earnings quality and balance sheet strength.

Conclusion: Navigate with Valuation Discipline

The Indian equity markets have rewarded investors with strong returns across all segments so far in 2025. However, this upward trend also brings valuation challenges and risk management imperatives. As investors gear up for the second half of the year, maintaining valuation discipline, focusing on fundamentally sound businesses, and aligning investment decisions with risk tolerance will be key.

Whether one chooses the comfort of large caps or the growth potential of smaller segments, a balanced, research-driven approach is essential to navigating the evolving Indian equity landscape in the months ahead. Often its being found the wrong comparison of investment portfolio with an index leads to loss of wealth for investors. Wrong assumptions and expectations are the key ingredients of wealth destruction.