For the better part of the 18 months leading up to February 2026, Indian markets were in a state of flux with penal trade tariffs, geopolitical tensions, selling from FPIs, and global interest rate action playing a part in creating this volatile phase. In the past 18-odd months, while the Nifty 50 TRI has done time and mild price correction (5% down from its peak in September 2024, till early March 2026), and the Nifty Midcap 150 TRI has similarly fallen by about 5% in the same period, the Nifty Small Cap 250 TRI is down over 15% from its highs.
In Jan-Feb of 2026, India-EU, India-US and India-UK trade deals were signed, and a growth-oriented union Budget was presented. In the backdrop of robust domestic GDP growth, pickup in corporate earnings and rise in demand following GST and income tax cuts, the signs were positive for the markets. However, AI-led jobs and business disruptions particularly for the manpower intensive and consumption-driving software sector, and a new war in west Asia have once again brought steep corrections in benchmarks and volatility back into the equation.
Therefore, allocating suitably across market capitalisations to create a diversified equity portfolio is critical for navigating the markets smartly over the long term.
Creating a smart all-cap portfolio
Building a portfolio across market caps would require adherence to a set of steps or smart processes for desirable outcomes.
At a broader level, macro and micro factors are to be considered. These include inflation, interest rates, fiscal deficit, current account deficit, GDP growth, demand scenario, overseas rate action as well as trajectory of global markets. These help to form a decisive view on the outlook for equities in general.
Next, the valuation parameters for the investment universe must be assessed thoroughly. So, price to earnings, price to book, and market capitalization to GDP are carefully checked to see if the components are overvalued or inexpensive. The attractiveness of any market cap segment is determined by doing a deep-dive into valuations. Technical indicators such as relative strength index can be used to determine oversold or overbought stocks (as an indirect measure of valuations as well). Based on valuation calls, suitable allocations with appropriate weightages are made to large, mid and small caps.
Allocation challenges
Indeed, the past 15 calendar years from 2011 to 2025, large caps have been the best performers in six of those years, midcaps for two years and small caps for 7 years. Predicting which market cap segment would do well in a specific year is challenging, thus making a diversified portfolio important as the underperformance of one market cap segment could be offset by outperformance of others. A diversified all-cap investment portfolio helps build a resilient set of holdings that can navigate multiple market cycles smartly.
Wrong timing of entry can hurt investor portfolios. Investors who went by the midcap rally from December 2006 to December 2017 and entered the category late in 2017 would have had to contend with a -12.1% return over Dec 2017-Dec 2018. Similarly, those fancying a continuity of the small cap run in the previous decade and entering the segment in December 2017 would have seen the category giving -19.1 over the next one year.
Retail investors struggle with multiple challenges. Unable to handle market volatility or extended periods of correction, they tend to panic sell and miss out on opportunities. They also tend to buy segments or themes at their peak rather than taking a steady disciplined approach and end up facing stiff corrections.
For such investors, building an all-cap diversified portfolio is best done via the fund of funds (FoF) route. An FoF that invests in large, mid and small cap funds based on robust in-house models to decide allocation patterns suited to prevailing markets and rebalances them periodically to retain the gains made is ideal.
One such fund is the newly launched ICICI Prudential Diversified Equity All Cap Active FoF, an open-ended Fund of Funds that provides access to actively managed equity schemes across market caps through a structured in-house strategy. The Fund Managers dynamically adjust allocations based on market conditions and their internal framework assessments. The New Fund Offer (NFO) is open from March 02 to March 16, 2026.