Mid, small-caps soften blow to equity funds in Jan

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Equity funds recorded a drop in net values in January, but nearly all of them fell less than the country's benchmark share index on lower losses in mid and small-caps and big bets on energy, bank and technology stocks.

Diversified equity funds, the largest group of stock funds by number and assets, lost 4.2% on an average.

By comparison, India's main stock index fell 6.3% on foreign portfolio outflows, concern over the strength of global economy and fears of Chinese policy tightening. Nearly 95% of India's 325 diversified stock funds lost less.

"Most of these equity funds had higher allocation to banking and technology sectors, which did well as compared to broader index like Sensex," said Chintamani Dagade, a senior research analyst at Morningstar India.

"Also, exposure to energy companies worked in their favour during the month."

The three sectors collectively accounted for about 40% of diversified equity fund assets at the end of December, data from mutual fund tracker ICRA Online shows.

In January, while the bank and tech stocks as measured by the BSE Bankex and BSE IT indices lost 4% or less, the BSE Oil and Gas index fell 5%.

A relatively lower decline in shares of medium and small firms, with the BSE Mid Cap and BSE Small Cap falling 3% and 1.5% respectively, also softened the blow from sharp falls in the funds' large cap portfolios.

Equity funds held nearly 43% of their equity investments in mid and small-cap stocks at the end of December, the highest since July 2008, on hopes India's economic growth would gain momentum.

While Indian industrial output rose at a faster-than-expected 11.7% in November from a year earlier, the central bank last week upgraded its economic growth forecast for the current fiscal year to 7.5% from 6% and predicted a similar rate of growth in FY11.

Leading the stock funds was a tax scheme from SBI Funds Management, which rose 2.88%.

Bond, Gold funds

Indian fixed income funds betting on government securities, which lost 0.14% on an average in December, bounced back in January to gain 0.4% as the federal bond yield closed the month down nine basis points.

The 10-year yields fell to their lowest in nearly six weeks on January 22 to 7.49% in intra-day trade, tracking an overnight fall in US yields, but ended the month at 7.59% after the RBI governor said next year's borrowing would be more challenging than the current fiscal.

The gold exchange traded funds lost 2.6% during the month as a strong dollar overseas dimmed the yellow metal's appeal as an alternative investment.

On the continuous charts , gold futures closed at Rs 16,200 per 10 grams, down 2.9% in January.