DSP Shifts Gears on Equities Amid Market Correction

Market Shifts: DSP Mutual Fund Report Suggests Equities Are Becoming More Attractive

A recent report by DSP Mutual Fund is signaling 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. The fund house has dropped its conservative stance on equities, citing that the current phase is suitable for adding equity exposure in moderate proportions.

This 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. However, that argument is now beginning to weaken.

Valuations Shift

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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. However, this does not make the market cheap. According to DSP's own framework, a fair multiple lies closer to 16.5x–18x, given current return on equity and earnings growth assumptions. The key shift is that valuations are no longer expanding—they are compressing toward fair value.

Market Opportunity

The opportunity is not everywhere—it is shifting. 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.

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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.

Market 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.

Global Signals

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.

Investor Takeaways

DSP's recommendation reflects a balanced approach. 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 is that 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, and opportunities are beginning to emerge—selectively.