Time To Be Smart: Why investors should shift to large-cap investments in 2025

The year 2025 has begun in the backdrop of several global economic headwinds. Geopolitical tensions and potential recessions have cast a shadow over markets. The instability has prompted foreign institutional investors (FIIs) have been selling in India through January.

This presents both opportunities and challenges for mutual fund investors. In such uncertain times, funds with pre-defined asset allocation frameworks lower tax burden and transaction costs, enabling investors to adopt a long-term investment horizon. Despite the volatility that equity markets might experience, sectors like pharmaceuticals, technology, and infrastructure are likely to offer growth potential. Debt funds could also provide stability in a volatile market, but investors need to carefully evaluate credit risks.

According to experts, while 2025 could be a good time to take home some profits, reduce risk, shift to large-cap investments, one should also adapt to changing dynamics.market outlook

Despite the uncertainties, mid- and small-cap stocks defied the odds and surged ahead, driven by solid performance from sectors such as pharmaceuticals, information technology, and infrastructure.

But 2025 brings with it larger geopolitical risks, trade wars, and changing government policies that could pose significant challenges to both economic growth and corporate profits. “The market outlook for 2025 will depend on a combination of factors such as domestic economic performance, global monetary policies, tariff decisions, and their effects on earnings revisions. Domestic institutional investors (DIIs) are expected to continue supporting the market, with the potential for increased foreign institutional investor (FII) ownership, currently at a low of 16.5%,” says Gaurav Misra, Head of Equity at investment management firm Mirae Asset Investment Managers (India). According to the Mirae Asset Debt Outlook 2025 report, the year is expected to provide a mixed yield curve. Short-term corporate bonds are expected to pay higher returns than long-term ones, which often reflects uncertainty in the corporate market.

For a three-month horizon, consider ultra-short and money market funds, benefitting from the steep money market curve and 50bps spreads over liquid funds, says the report. For 6-12 months, low-duration funds offer exposure to both the money market curve and one-to-three-year corporate bonds, anticipating spread normalisation. For a horizon exceeding one year, short-duration funds have a mix of government securities and three-to-five-year corporate bonds, aiming to lock in yields and capitalise on potential capital gains as interest rates adjust. Finally, for long-term investors, the long-duration category remains attractive, capitalising on economic resilience and structural strength, the report says.

STRATEGIC ASSET ALLOCATION

Asset allocation is the cornerstone of managing systemic risk. Higher capital gains taxes and increased transaction costs have made frequent portfolio reshuffling counterproductive. Taxes and transaction costs, such as securities transaction tax (STT) and stamp charges, apply only at the time of redemption. To minimise these costs, focus on holding investments for longer periods and aligning their investments with their long-term asset allocation strategy, say experts.

“In the current market scenario, hybrid funds such as equity savings, balanced advantage, and multi-asset funds stand out as strong options. These funds manage pre-defined asset allocation at the fund level, reducing transaction costs and tax impact. Additionally, their ability to adjust risk dynamically-reducing exposure during unfavourable market conditions and increasing it when markets are low-enhances long-term, risk-adjusted returns,” says Sachin Jain, Managing Partner at investing platform Scripbox.

According to Misra, a diversified investment strategy could be adopted, depending on individual investor’s risk tolerance and investment goals. “Multi-asset allocation funds are often recommended in a volatile market. Hybrid funds, due to their flexible asset allocation, can also be included in the core portfolio... maintaining proper asset allocation is crucial.”

THE SIP APPROACH

Deploying money systematically through systematic investment plans (SIPs) also helps in mitigating volatility and generating wealth in the long term. Maintaining discipline, setting rational expectations, and focussing on strategies that prioritise risk-adjusted returns are key to achieving financial success. "SIPs take the emotional quotient out of investing and bring in an element of discipline that could lead to strong compounding returns in the long run," says Satish Ramanathan, CIO of Equity at asset management company JM Financial AMC.

According to Ramanathan, in the last two years, investing in SIPs was not as successful as one-time investing due to a sharp upward trend in the markets. “We do think that SIPs are one of the best modes of investing... Systematic investing through uncertainties rather than making efforts to time the market could lead to superior outcomes for investors in the long run," he said.

PORTFOLIO FOR 2025

Investors might consider taking exposure to funds that provide superior risk-adjusted returns. Consistency with superior risk management capabilities could be the key to mitigate risks. "While 2025 is like any other year, we should expect slightly higher levels of volatility till the markets adjust themselves to new macro realities but that large economies like the US are doing very well, corporate performance is fairly strong and broader economic performance is fairly robust. Several large countries including perhaps even India will see rate cuts which augurs strong support for corporate profitability and a stable demand scenario in the economy,” says Ramanathan.

Jain says a balanced allocation for 2025 should include large-cap equity funds, hybrids, short-term debt funds, and gold. "Staying disciplined, focussing on long-term objectives, and avoiding excessive tactical shifts are key to a prosperous investment journey," he says.
 

@imNavneetDubey