'Investors should take 3-5 year view when investing in small, midcaps'

Markets are evenly poised, anticipated rate cuts can provide positive impetus to the market going forward, believes Suresh Soni, CEO of Baroda BNP Paribas Mutual Fund.

Mid-and smallcaps have been battered badly in the last few weeks. SURESH SONI, chief executive officer at Baroda BNP Paribas Mutual Fund in conversation with Puneet Wadhwa says that broader market valuations at less than 20x FY25e earnings per share (EPS) appear comfortable. Edited excerpts:

What's your broad call on the markets right now?

Indian equity markets represent probably the best wealth creation opportunity from a medium to long-term perspective. While there is reason for optimism, given that the Nifty 100 is up by nearly 17 per cent over the past six months, there always remains a possibility that one may see a period of consolidation in the near-term.

Do you think that the regulators – Sebi and AMFI – have over-cautioned as regards mid, small-caps and set a cat amongst pigeons?

Sebi has been taking a series of steps to ensure rising investor participation does not turn into euphoria. Towards this, the market regulator has in the past cautioned investors on risks of futures & options (F&O), and has asked mutual funds (MFs) to publish portfolio liquidity statistics for small and mid-cap funds. They have also cautioned investors on froth in certain areas of the market. I believe these are all right steps to improve investor awareness and will lead to healthy development of the market.

We have seen some instances of poor-quality stocks rising dramatically and some cases of investors discounting future earning potential too quickly leading to rapid rise in stock prices. These are areas where investors need to be cautious.

That said, the small and mid-cap segment remains an attractive play from a long-term perspective given the inherently high growth rates and a wide range of industries and sectors. However, given the inherent volatility, investors should take at least a three to five-year view when investing in small, midcaps. The best way to participate is through a diversified portfolio like MFs.

Have the broader market valuations become attractive post the recent correction?

Broader market valuations at less than 20x FY25e earnings per share (EPS) appear comfortable, and we believe the markets are evenly poised. Anticipated rate cuts can provide positive impetus to the market going forward.

What has been your investment strategy in the last 6 - 8 months?

Our equity funds have largely focused on the 3Cs of credit, capital goods and consumption. While strategically, we prefer the 3Cs, tactically we switch between sub-segments of each. Though we are constructive on the capital goods sector, we expect the order flows to slow in the near-term due to the impending elections and the monsoon season.

Similarly, within financials, capital market plays are preferred over lenders who may face headwinds on net interest margins (NIMs). On the consumption side, we like plays on new age distribution like modern retail and e-commerce as well as emerging segments like foods and beverages.

Will the electoral calendar add to the volatility in the months ahead?

We don’t think the domestic electoral calendar will lead to market uncertainty. However, the US election, geopolitical risks, and the monsoon may lead to some volatility. The post-COVID, post Russia-Ukraine hostility rebound in the global equity markets is now done and the global market rise from here will be a lot more selective.

Are you facing any redemption pressures?

While flows have been polarised in the last few quarters towards small and mid-cap funds, we expect flows to be more evenly distributed across a wider range, say large-cap funds and Balanced Advantage Funds. Also, as declining interest rates lead to mark-to-market (MTM) gains in bond funds, we expect increased flows in fixed income funds as well.

Baroda BNP Paribas MF will complete two years. So, what do the next two years look like?

What we are trying to build is a fund house, which focuses on mass retail, offers solutions and products through the length and breadth of the country. We are present already in 115 cities and will continue to expand our physical and digital presence. Our business is all about investment management and over the last two years we have focused on building a robust investment platform. We aim to be amongst the top 10 in terms of new industry flows over the next five years.

Can you shed some light on Baroda BNP Paribas Innovation Fund NFO that collected over Rs 900 crore recently?

The investment universe for this fund will be across three categories - Digital Natives, Transformers and legacy companies adopting innovation. Digital Natives are born digital companies. Transformers or enablers are companies that support such disruption.

Finally, in sectors where disruptions can happen, the legacy companies that innovate will thrive. Between these three themes, we have bucketed companies in auto, manufacturing, new age platforms, chemical/pharma and IT services sector. Innovation-led companies would not only survive, but also grow faster than the industry to help generate alpha in the fund.