Policy context supports growth in services alongside manufacturing, with services sector growth historically averaging about 7% year-on-year over the past two decades.

Earnings visibility is strongest in Financial Services, Healthcare, and Consumer Services due to factors like low credit penetration, aging demographics, rising wellness focus, and rapid digital acceleration, with IT remaining a key growth area amid AI-driven transformation.

A sample long-term SIP allocation suggests a diversified core: 20% in hybrid funds, 20% in large-cap, 20% in mid-cap, 20% in small-cap, and 20% in thematic/value/services/consumption categories for a ten-year horizon.

IMF projections indicate India could grow around 6.4% in FY27, potentially making earnings growth the primary driver of market returns, barring geopolitical shocks.

Valuations show mid-cap and large-cap indices trading below their eight-year averages, suggesting a favorable risk-reward, while small caps trade at a premium.

Earnings growth is likely the main driver of future returns, with sector rotation a fallback if momentum falters and corporate turnarounds remaining company-specific.

Growth drivers identified include data engineering, cybersecurity, cloud integration, GPUs/NPUs/TPUs-based semiconductor infrastructure, edge-AI devices, and data center hardware.

Despite near-term IT headwinds from AI disruption and tariffs with weak FY27 guidance, upside remains as pilots scale to enterprise AI deployments, including investments in data centers and edge hardware.

AI disruption is impacting India’s US$280 billion IT services sector in the near term, but could become the next growth engine as deployments scale from pilots to enterprise-wide implementations, according to Baroda BNP Paribas Mutual Fund.

Long-term opportunities lie in data engineering, cybersecurity, cloud integration, specialized semiconductor infrastructure, and AI-enabled hardware as key growth drivers for enterprise adoption.

The investment discussion centers on valuation versus growth, potential sector rotations if earnings worsen, and the role of growth-at-a-reasonable-price (GARP) in identifying mid-cap themes.

Within Financial Services, the preferred exposure is to mid-cap banks, followed by NBFCs and platform companies, highlighting the risk-reward in this subsector.