Flexi Cap Funds Can Be Good Option For The Investors

 Suresh Soni, CEO, Baroda BNP Paribas Mutual Fund

Suresh Soni, CEO, Baroda BNP Paribas Mutual Fund, speaks about navigating the current market volatility with mutual funds. “The world is experiencing the highest inflation in the last 40-50 years on the back of sharp rise in commodity prices. This in turn is forcing central banks to aggressively raise rates. Being a commodity importer, India has been hit on inflation as well as the currency front,” says Suresh Soni, CEO, Baroda BNP Paribas Mutual Fund.

Most investors are concerned about the current situation in the market. How do you view the situation?
Equity markets create wealth over long-term, but for that we have to contend with volatility in short-term. There are times when due to certain factors, markets come down, but they seldom stay down for long.
In the current year, geo-political events, unprecedented rise in inflation, rate hike and recession fears have led to volatility in stock markets worldwide. S&P 500 ended the first half of 2022, down 20.6%, worst start to a year since 1970. Indian markets have been somewhat resilient but have fallen by 10-15% nonetheless. While there is some impact of high commodity prices, our high frequency indicators continue to indicate robust economic growth. Over the last year, the market has fallen around 15% whereas corporate earnings have risen by around 20%, thus effectively valuations have corrected by around 35%. We believe investors could do well to invest in equities with a time horizon of over 3-5 years.

Inflation and interest rates are monopolising most of the conversations. It seems, most talk is influenced by global economies that are battling unprecedented levels of inflation. What is your assessment of the Indian scenario?

The world is experiencing the highest inflation in the last 40-50 years on the back of sharp rise in commodity prices. This in turn is forcing central banks to aggressively raise rates. Being a commodity importer, India has been hit on inflation as well as the currency front. Thankfully our food grain stocks are good, giving us some comfort on food inflation. This has been a saving grace for India.

For the first time in my working career, I have seen US inflation to be more than India. Central banks’ action on inflation has been swift and decisive. We have seen Fed hiking in steps of 75 bps and RBI in steps of 50 bps, against usual 25 bps steps. I believe the adjustment, though more painful, will be swift. While RBI has raised policy rates by 90 bps so far and may raise another 75-100 bps, the bond yields have already risen by about 90 to 100 bps in 2022 and as such further rise in bond yields have already risen by about 90 to 100 bps in 2022 and as such further rise in bond yields will be moderate.

Recently we have seen significant moderation in commodity prices- wheat, palm oil, metals, crude oil- all have seen moderation. A good monsoon and easing global commodity prices could provide much needed breather to India on inflation going forward. Net net, historically India has witnessed much higher rates of inflation. In a fast-growing economy like India, moderate levels of inflation and even corresponding interest rate hikes could be easily absorbed by the economy.

Every crisis is a challenge and opportunity for the mutual fund industry. It managed the covid phase quite well. How is the industry faring this time?
Mutual fund industry has seen over 50% growth in AUM from March 2020. This growth has been aided by growing affluence and awareness coupled with digitisation, which is making access to investment solutions easier. Mutual funds, with the ease of investment and diversification benefits, have become the preferred investment vehicle for investors. Given that even today mutual funds have been owned by only 3 crore unique investors against 50 crore registered Income tax PAN in the country, the further scope for penetration remains huge. We believe the mutual fund industry will continue to see structural growth.

Of course, like all capital market products, mutual fund industry is also seeing some moderation in flows due to recent market volatility. However, the structural growth story seems to remain strong.
 

Emotional maturity of investors is helping the industry a lot. What has been your experience?
One welcome change that we have seen in the industry over last few years is strong growth in SIP accounts. Today around 50% of all industry folios are accounted by SIP investors. The way SIP is designed, it takes the discussion away from short-term volatility and allows investors to focus on long-term saving and wealth accumulation. I must compliment publications like yours as well as critical role played by financial advisors to promote mutual funds as long-term investment products.

Indian investors have shown strong maturity and have used the COVID correction to increase their exposure to mutual funds. Also, the SIP investors have shown remarkable resilience and SIP flows have remained steady.

The sharp decline of mid and small cap segments is causing a lot of pain. How do you see the situation?
Indeed, small and mid-cap segments represent future leaders as compared to large-caps who are current leaders. This segment offers higher growth potential but also comes with higher volatility. Small cap stocks were the worst performer in 2018-2019 but exhibited very strong performance in the last two years. Recently, small caps have seen slightly higher decline compared to large caps in last few months. From a relative value perspective and given the volatile environment, we will currently tilt a bit more towards large caps relative to small caps.

However, from a simplistic perspective, flexi cap funds can be good option for the investors. Here the fund manager is expected to actively switch between various market caps based on valuation parameters. Investors may consider the same after consulting their financial advisor/ distributor.