India earnings outpace stock prices, lifting large and mid-cap funds
A widening gap between corporate earnings growth and stagnant stock prices in India is creating attractive entry points for large and mid-cap equity funds.
Indian equities are experiencing a sharp divergence between corporate earnings and stock prices, presenting a potential opportunity for investors in large and mid-cap funds. Over the past two years, companies in this segment have delivered earnings growth of 14% to 16%, while their share prices have risen by just 1% to 2%. This disconnect suggests that underlying business fundamentals are not yet reflected in market valuations.
The disparity is most pronounced in mid-caps, where earnings per share grew 26% over the last year but prices appreciated only 5%. Large-caps saw 11% EPS growth against a 3% price decline. Abakkus Mutual Fund argues this dynamic has significantly improved the risk-reward equation, with nearly 59% of stocks in the large and mid-cap universe now trading more than 20% below their all-time highs.
Together, large and mid-cap companies represent a substantial portion of the Indian market. Based on December 2025 data from the Association of Mutual Funds in India, these segments account for 79% of the country's total listed market capitalisation. Large-caps make up 57% of the market, while mid-caps represent the remaining 20%.
This broad footprint makes the large and mid-cap fund category a primary vehicle for gaining exposure to India's economic growth. Regulators require these funds to allocate a minimum of 35% to both large-caps and mid-caps, enforcing a structural balance between the stability of established market leaders and the higher growth potential of mid-sized firms.
The shift toward an earnings-driven market makes active stock selection critical. Over the past five years, 103 companies in the segment delivered compound annual growth rates exceeding 20%, including 11 large-caps and 19 mid-caps that surpassed 40% CAGR. "Markets are increasingly rewarding businesses with strong fundamentals rather than broad market participation," said Vaibhav Chugh, CEO of Abakkus Mutual Fund.
The firm expects this valuation gap to narrow as fundamentals eventually drive price appreciation. "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," Chugh said. For international investors tracking Indian equities, the current price-to-earnings divergence signals a potential mean reversion in the broader market.
