As the carnage continues in the stock market especially in the midcap section, retail investors turn jittery. Both small and midcap indices have underperformed benchmark indices for the most part of the previous two weeks. However, the investors must not worry much as they can still get good returns in such a volatile environment, says R Venkataraman, Group MD and Co-Promoter, IIFL Group. The SIP route in midcap funds offers a relatively safe bet for the retail investors, the market veteran tells Financial Express Online. On pledged shares, Venkataraman tells Ashish Pandey of Financial Express Online that the concerns related with the mutual funds going down \u00a0on account of risky promoter lending seem slightly exaggerated currently. Also read: Share Market Live: Sensex under pressure, Nifty below 10,800; Kotak Mahindra Bank slumps 5% Here are the edited excerpts from the interview: The stock markets have largely remained volatile despite the recent budget sops and RBI rate cut. Why is it so? How long will the volatility continue? Currently, the market remains polarized with a conspicuous absence of excitement. Also, market participants are awaiting proper cues, domestic and global, at the moment to get conviction for allocation towards equity. The Nifty is trading just 8-9% below its lifetime high, with small and midcaps being significantly down. In this scenario, if one does not hold the top an HUL, TCS or HDFC, portfolios would have taken a hit, which explains the lack of interest in the markets. The upcoming general elections are only adding to the uncertainty, contributing to the volatility. Concerns regarding liquidity also have not subsided. We expect the volatility to continue until the election results come around. What factors would drive the stock markets going forward? The global scenario remains plagued with uncertainty. The ongoing trade tensions between the US and China, concerns around Brexit, and bleak economic data from the Eurozone and China are currently dictating the markets. On the domestic front, investors are using the wait and watch approach with respect to elections. The recent geopolitical tensions and how the government tackles them are also expected to weigh on sentiment in the short term. With equity mutual fund inflows falling to a 2-year low in the month of January. What is the likely trend going ahead? Equity mutual funds have delivered a lacklustre performance over the last year, which has been a major dampener for the markets. Investors have become more wary over credit events that occurred over the last 6 months as well as market volatility. However, we have seen that retail participants have stayed put with their SIPs and overall inflows are likely to rise once certainty prevails around elections and global issues. Is there a fear in the market related to pledged shares? Shares pledged by promoters grew by over 50% in value in 2018-19 over the previous year, a large part of which involved mid and smallcap companies. This trend has led to investors staying cautious on these stocks, especially over fear that the value of the pledged share will correct further. However, concerns regarding mutual funds going down owing to risky promoter lending seems slightly exaggerated at the moment. What's your take on NBFC crisis? We remain optimistic about the NBFC sector which is uniquely placed given its distribution strengths, risk management systems, and low-cost delivery models. We expect NBFCs to continue their growth trajectory. Although we have recently seen that the sector as a whole has got re-rated because of liquidity and asset liability management issues, this was mainly due to short-term liquidity concerns in the entire Indian ecosystem as CPs became tight. However, the sector had a dream run until October 2018, and some correction was necessary. It should be noted that the demand for credit in an underpenetrated market like India will remain considerably robust. The sector is seeing gradual resolution of critical issues such as liquidity and the availability of long-term resources and until these get sorted, without a doubt, the sector may go through challenging times. Share your advice for retail investors? Where should investors invest - large-cap funds relative to mid-cap funds? We remain optimistic regarding India\u2019s growth story and expect the current dullness in the markets to be short-lived. The RBI, in its latest monetary policy, has changed its stance to \u201cneutral\u201d and cut rates by 25bps. Steps are being taken to enhance credit flows at an affordable cost of capital to ensure that there is no downward spiral. Further, the entire economic system is adjusting to far-reaching changes such as GST, Bankruptcy Code, and RERA. It must be noted that benefits from such reforms materialize with a lag. Hence, retail investors are advised to stay put with their investment plans, specifically their SIPs and accept the dull performance of the markets over the year as part of any market cycle. As regards large and midcaps, over the last year, the Nifty50 has given almost flat returns YTD, while the Nifty MidCap100 plunged ~23% YTD. Although midcaps are considered to be riskier than large caps, with the recent downfall, they hold the potential for more returns, specially, if one is selective and has the appetite to hold the stocks over a relatively long term. Thus, as of recent prices, midcaps do present an opportunity to selectively invest and reap higher returns. The SIP route in midcap funds may be a relatively safe bet for retail investors.