'Make use of market volatility' There is heightened volatility experienced by markets all around the world, and interest rates are being raised on the back of high inflation. BIZ Experiences India catches up with Suresh Soni, CEO, Baroda BNP Paribas Mutual fund on current market situation, advice for investors and evolution of the mutual fund industry over the years. Edited excerpts from the interview.

Your assessment about the prevailing market conditions, especially the Indian scenario.

Developed world is grappling with the highest inflation in the last four decades which is prompting central banks to aggressively raise rates. This in turn is stoking the fear of recession and leading to volatility in financial markets. India has, however, done significantly better during this time. Our inflation, though high, has been rather manageable and the economy has shown remarkable resilience. We believe, given the large domestic base, our economy could remain relatively less impacted by anticipated global slowdown. The foreign capital flows are more closely linked to the global environment and could remain volatile. Thankfully, we have seen significant growth in domestic investors' participation in the equity market.

Sectors you are positive on going forward

We believe that India's economy would continue to grow stronger compared to other large economies – primarily led by domestic consumption and spending. Therefore, we are overweight in domestic oriented sectors like financials, consumer discretionary, industrials and health care. India could benefit from the tailwinds of softening commodity prices. We are also seeing the early signs of revival of the capex cycle. Finally, the long term story of premiumisation, underpenetration and favourable demographics continue to underpin the India growth story.

One question on investors' minds today is whether this is a good time to enter small-cap funds.

Small cap funds as a category are more volatile and may occasionally witness sharp drawdowns. We believe investment in small cap funds should be for the long term, say more than five years. Please be aware that performance can diverge for significant periods of time vis-à-vis other diversified equity funds.

As a percentage of overall folios, passive folios have almost tripled over the last two financial years. Is the case for passive funds getting stronger?

Passive fund industry has witnessed increased investor acceptance in recent years and the industry has been growing faster than active funds, though on a smaller base. Currently, passive funds account for 15% of overall industry assets, and we anticipate their share to rise in coming years. Having said that, we continue to see strong demand for active funds and do expect them to retain dominant share in the industry AUM. We are watching the development in the space of passive funds and may also consider entering passive space with clearly targeted offerings.

In the last few years, mutual fund industry has evolved significantly.

True. The evolution of the mutual fund industry is brought about by market developments as well as the regulations over the years. Retail investors now contribute a larger share of the AUMs than institutional investors. The increase in the SIP AUMs and accounts on a month-on-month basis has been a heartening development for the industry.

One investment mantra you swear by.
Make use of market volatility. You can either have good headlines or good prices, seldom will you have both together. When headlines are bad, you get stocks at attractive valuations. Markets may come down on bad headlines, but they do not stay down forever. For a long-term investor, these are opportunities to accumulate equities and create long-term wealth. Decide your asset allocation and stay on course.