The reduction in GST and income tax, revival in government capex, recovery in consumption, controlled fiscal deficit and fall in inflation set the stage for a robust macro background. GDP growth is expected to be 6.8% in FY26 according to the RBI, which is among the highest in the world.
Corporate earnings, too, are on a return to an expansionary path.
Even as India’s macros remain robust, valuations are certainly not in the comfort zone.
1 December 2025
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The Nifty 100 TRI is at PE multiple of 22.59 and PB ratio of 3.54 according to NSE data. On the other hand, the Nifty Midcap 150 TRI (PE: 34.12; PB:4.4) and the Nifty Small Cap 250 TRI (PE: 30.76; PB: 3.68) trade at much higher valuation multiples. (as of October, 31, 2025)
Flexicap investing works best when discipline guides every stock and sector choice
Given this background, taking a flexicap approach by blending large, mid and small cap equities may yield desirable outcomes along reasonable risk management via portfolio diversification.
However, for flexicap investing to work, it is important to follow a set of systematic steps for stock/sector selection and portfolio construction.
Setting The Tone
A few key factors would help set the context for flexicap investing.
Now, market valuation multiples (PE, PB etc.) help determine whether equities are cheap or expensive and trigger buy/sell decisions. Market valuations are currently not cheap, but continue to be in the neutral zone.
Indicators such as capacity utilisation and credit growth help investors make sense of whether the business cycle is weak/recovering/strong. Presently, capacity utilisation is at 75.8% as of April-June 2025 and has seen a mild uptick, according to RBI data and credit growth is around 11.4% YoY as of early October. Both are reasonably healthy.
Positive triggers include earnings growth revival among corporates in the recent quarter. Central bank actions and the progress of US trade tariff negotiations would determine the way forward and may keep markets volatile.
While FPIs continuing to sell in recent months is a negative sentiment factor, DIIs have maintained their buying spree. Therefore, the market sentiments continue to be neutral.
In a flexicap approach, when negative triggers are in operation, large caps ensure that the portfolio downside is limited as they tend to be less volatile than mid and small caps. Large caps provide stability to the portfolio by containing risks.
On the other hand, when positive triggers are at play, fundamentally robust mid and small caps get the potential for valuation re-rating. With rising revenues and profitability, they generate strong performance, thus lifting the overall portfolio.
By straddling multiple market cap segments, flexicap investing is a recipe for portfolio diversification.
Process orientation
Flexicap investing involves identifying opportunities across market caps. A mix of top-down approach for identifying potential large caps and a bottom-up approach for discovering mid and small cap opportunities is the most suitable investment approach.
Security selection also incorporates factors such as macros, company fundamentals, valuations, and long-term growth prospects.
Market cap allocation would depend on valuations and the macro environment.
The portfolio must avoid concentration in sectors/stocks to create diversified holdings.
Flexicap investing is best done via mutual funds for retail investors as fund managers with in-house models help juggle holdings smartly.
Disclaimer: The Views are Personal and not a part of the Outlook Money Editorial Feature
