Expected Return in Large Cap Stocks

I have consistently advocated investing in large cap stocks for the last about 2 years. Naturally, I find it hard to agree with those who have an overwhelmingly clear view that – Companies belonging to a large index like the Nifty and the BSE Sensex are a waste of time.

Somebody recently asked me my expected return in large cap stocks going forward. Without giving a number, I said this – higher than what you will make in any other basket of stocks over the next 2-3 years. Of course, there will be exceptions and a carefully crafted portfolio of small and mid cap stocks can surely perform well.

The possibility however of making very good returns with very little risk by investing in large cap stocks, far outweigh the possibility of achieving the same in mid/ small cap space.

This situation has prevailed for many quarters now. Here’s a tweet dating back a year:

How to do an SIP minus commissions. Buy the stocks below with a fixed amount every month: ONGC ITC SJVN TCS HDFC BANK

— Rajat Sharma (@SanaSecurities) March 29, 2016

1 year forward, here’s what these stocks have delivered:

1 YEAR DOWN, Here’s what this basket fetched:
ONGC= UP 39%
ITC= UP 25%
SJVN= UP 29%
TCS= UP 15%
HDFC BANK= UP 34%
(Excluding Dividends ~ 2%) https://t.co/jrAzHi4sL0

— Rajat Sharma (@SanaSecurities) February 20, 2017

No, the idea is not to gloat in the glory of these returns. During the last 1 year, some of my recommendations have gained over 100% but they were and remain risky. The point is this – I feel as comfortable holding the above large cap stocks today as I did a year back.

Even starting today, the list of stocks mentioned above will give you very good returns in a rising market and will protect your capital much better than most other allocations in a falling market.

You dont have to be anywhere close to being the smartest person to realize that there is an uncomfortably large valuation differential between large and small cap stocks.

Also Read: Large Cap vs. Small Cap Stocks – Valuation Differential

If you go by the number of fund houses and PMS Schemes that have stopped accepting money for their micro and small cap funds, the situation becomes clear.

Related: Largecaps to lead market, time of mid and smallcaps over: Rajat Sharma, Sana Securities

As of today, in the ultimate analysis I believe that not only are large cap stocks safer, but they may also deliver better returns than mid cap stocks going forward.

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