A recent report by DSP Mutual Fund is signalling a subtle but important shift in how the market is being read at a time when most investors are still unsure whether the correction has further to go.
“We are dropping our conservative stance on equities,” the fund house said in its April 2026 Netra report, adding that the current phase “is suitable for adding equity exposure in moderate proportions.”
That change in stance matters. Not because it marks a clear bottom, but because it suggests that the balance of risks is no longer worsening. For months, the dominant narrative was simple: valuations were too high, liquidity was selective, and the margin for error was thin. That argument is now beginning to weaken.
Valuations are no longer the problem—but they aren’t cheap either
The first and most obvious shift is in valuations.
The Nifty is now trading below 20 times earnings and closer to 19x on forward estimates—almost in line with its long-term average of 18.9x. This does not make the market cheap. By DSP’s own framework, a fair multiple lies closer to 16.5x–18x, given current return on equity and earnings growth assumptions. But what has changed is direction. Valuations are no longer expanding—they are compressing toward fair value.
That shift is often underestimated.
Markets rarely move from expensive to cheap in one straight line. More often, they pass through a phase like this—where excess is slowly unwound, and prices begin to reflect reality rather than optimism. In fact, much of this correction has already happened quietly. In dollar terms, Indian equities have given up nearly four-and-a-half years of gains, returning to levels last seen in 2021, the report highlighted. It is a reminder that corrections do not always arrive with drama; sometimes, they arrive with time.
The opportunity is not everywhere—it is shifting
If the report makes one thing clear, it is this: the opportunity is selective.
Large-cap stocks, especially in sectors such as banking, IT, healthcare and FMCG, are now trading at or below their long-term valuation averages. The top names in the index are, in fact, closer to historical valuation lows than highs—levels that, in the past, have coincided with periods of pessimism rather than exuberance.
Small- and mid-cap stocks, however, tell a very different story.
Even after the recent correction, valuations in this segment remain elevated relative to their own history. Median multiples are still significantly above long-term averages, suggesting that the process of adjustment may not be complete. This divergence is important. It signals that the market is not becoming cheaper across the board—it is becoming cheaper in quality.
Markets are already showing signs of stress
Corrections are not defined by how much the index falls. They are defined by how the market behaves underneath. Right now, several indicators suggest that stress is already visible.
Market breadth has weakened sharply, with only a small fraction of stocks trading above key moving averages. Volatility has risen, with India VIX crossing levels typically associated with panic-driven selling. And the market has gone through four consecutive months of decline—a relatively rare occurrence in its history.
Individually, these signals do not confirm a bottom. But, according to DSP MF, the downside is limited from the current levels.
Global signals are becoming less hostile
There is also a quiet shift happening outside domestic markets.
The Indian rupee, on a real effective exchange rate basis, is near historically weak levels—conditions that have often coincided with improved foreign investor interest. Foreign flows, which have been a drag on markets, tend to follow valuation comfort rather than lead it. When markets become reasonably priced, capital tends to return—not when optimism is at its peak, DSP MF report said.
At the same time, the gap between bond yields and earnings yields has narrowed significantly, improving the relative attractiveness of equities. These are not decisive triggers. But they are early signs that the macro environment is no longer working against equities in the same way it was a few quarters ago.
Where the market is getting interesting
The most visible impact of this correction is in pockets of the market that had been ignored earlier.
Large private banks, for instance, are trading near valuation levels last seen during periods of stress, despite maintaining stable asset quality and reasonable growth prospects. IT stocks, which had gone through a prolonged phase of re-rating, are now available below their long-term valuation ranges, even as their return profiles remain strong.
Why caution is still warranted
Despite the improving setup, the report stops short of calling this a market bottom.
The Nifty’s drawdown from its peak is around 15.5%—noticeable, but not as deep as previous bear market corrections. Small- and mid-cap valuations remain elevated. And global risks—from oil prices to capital flows—continue to linger in the background.
In other words, while the conditions are improving, they are not yet decisive.
What should investors do now
DSP’s recommendation reflects that balance.
Rather than calling for a sharp increase in exposure, the report suggests a gradual approach—adding equities as valuations improve, focusing on large-cap and high-quality businesses, and using systematic investments instead of lump-sum bets.
In small- and mid-caps, the advice is even more cautious: rely on active managers, stay valuation-aware, and avoid chasing momentum.
This is not about timing the bottom. It is about being prepared for what comes next.
The bottom line
DSP’s latest report does not say that markets have bottomed.
What it does say is more useful:
- valuations have corrected
- stress signals are visible
- opportunities are beginning to emerge—selectively
For investors, the takeaway is not to turn aggressive overnight.
It is to recognise that the market is changing—and to respond before that change becomes obvious.
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
