After a volatile first half of 2026 marked by geopolitical uncertainties, fluctuating crude oil prices and mixed corporate earnings, mutual fund investors are reassessing their investment strategy for the second half of the current calendar year. While equity markets have shown resilience, valuations in certain pockets remain elevated, prompting investors to seek clarity on asset allocation, fund category preferences and portfolio positioning.
Shivam Pathak, CFP and Founder of Asset Elixir shared with ETMutualFunds large-caps look better placed right now since their valuations are below historical averages, while mid-caps remain on the higher side.
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He further said that a flexi-cap fund works well as a core holding, since it can move between large, mid, and small caps as needed. Multi-asset funds are also worth considering, given their ability to balance across equity, debt, and commodities as conditions change.
Pallav Agarwal, Certified Financial Planner at Bhava Services LLP, shared a similar view with ETMutualFunds and expects earnings growth to improve during the second half of the year.
Agarwal said that, “We expect the corporate earnings to grow from single digit to double digit in the 2nd half of this year driven primarily by GST reforms, low base and stabilising geopolitical situation.
He further said that in this environment, large cap and flexicap funds offer the best risk adjusted returns given reasonable valuations. For conservative to moderate investors, Multi asset allocation funds can be a good pick which give exposure to precious metals also
Biggest risks in H2 2026 and current valuations
According to a release by Tata Mutual Fund, the earnings for the next 2 financial years is expected to grow at nearly 17%. Commenting on the current valuations, the note further said that Nifty is trading around 18.5 times earnings, compared with a previous peak of around 23 times.
“The mid cap index has relatively outperformed small cap and large cap indices in the last 1 year. The valuation premium of small caps vs large caps has meaningfully corrected; it has come down to 18.3% in May 2026 from a high of 21% in June 2025,” it further said.
Valuations majorly across markets have moderated while India’s long-term investment outlook remains constructive, with consensus estimates indicating EPS growth of ~ 16–17% CAGR between FY27 and FY28. Tensions in west Asia continue to pose a threat to earnings revival and delay recovery in valuations
Even as markets remain near fair valuations, several macroeconomic factors could influence investor sentiment in the coming months.
Agarwal said that the biggest risks to watch are global tensions, rising oil prices, a weakening rupee, and company earnings not improving as expected and markets are not cheap here, but they're not expensive either, more near the fair value zone.
He further said that Nifty is still finding it tough to break the range on the upside in absence of strong corporate numbers. No matter what, keep your SIPs running, trying to time the market has never worked. If you have a lump sum to invest, stagger it into 3 to 5 tranches and invest over the next 6 months.
To this, Pathak said that key risks include rising crude oil prices and continued foreign investor selling, both of which have added volatility this year and valuations are largely fair, not cheap, so this isn't a time to go all-in with lump sums.
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That said, SIPs should continue as usual-they work precisely because they invest through both expensive and cheap phases, rather than trying to time entry, Pathak further said.
What should first-time mutual fund investors do?
There are many first-time investors who are willing to allocate in the categories which offer high returns, have low or high risk, and offer tax benefits. There are many new investors who are wondering where to invest amid the market volatility, geopolitical tensions and other factors.
For new investors entering the market, simplicity and discipline remain the key themes. Pathak said that such investors can start with a large-cap or flexi-cap fund through SIP rather than a lump sum.
Avoid jumping straight into small-caps or last year's best-performing fund, since past outperformance rarely repeats. Think in terms of a 3-5 year horizon, not the next few months, he further said.
Agarwal echoes a similar approach. He said start with a large cap fund or a flexi-cap fund through SIP and avoid mid and small cap funds at these valuations and uncertainty may keep markets range bound in the near term, but in the long term earnings growth will return with improved macro indicators.
He further said to avoid thematic or sectoral funds at least for the first 4-5 years or till the time such investors learn how to handle volatility.
Correct approach: Aggressive or defensive?
With markets facing both opportunities and uncertainties, many investors are wondering whether they should continue investing aggressively in equities or take a more cautious approach.
While hopes of better corporate earnings are supporting sentiment, concerns around global events, oil prices and market valuations are making investors rethink their strategy for the second half of 2026.
Agarwal said that the right approach is to be cautiously optimistic and not being defensive. “We expect the earnings to recover from here but in selected pockets, so a diversified large cap based fund would be an ideal choice.”
He further said that the biggest mistakes to avoid is stopping SIPs because of short term non-performance or volatility and chasing last year's top performers.
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In response to this, Pathak said that a slightly defensive tilt makes sense-staying invested in equity, but leaning more on large-caps, rather than chasing mid and small-cap momentum.
He further said that the biggest mistakes to avoid: stopping SIPs during volatile phases, chasing sectors that have already rallied, and treating short-term dips as a reason to exit instead of staying the course.
One should always choose a mutual fund based on their risk appetite, investment horizon and financial goals.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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