Equity mutual funds lose on energy, consumer bets

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Equity mutual funds recorded a drop in net values in February, contrasting a positive return from local shares as their bets on small and medium sized firms and those mainly in the energy and consumer sectors tumbled.

Actively managed diversified stock funds, the biggest mutual funds category by number and assets, saw an average 0.3% loss, according to data from global funds tracker Lipper.

Seven of every 10 such funds underperfored the 0.44% gain in the BSE Sensex, the data showed.

"These funds have had higher exposure to mid and small caps, which underperformed the large cap indices," Chintamani Dagade, a senior research analyst at Morningstar India, said.

"Additionally, their exposure to energy and fast moving consumer goods stocks dragged down their returns," he added.

Indian equity mutual funds heavily rely on relatively illiquid small and mid-cap stocks to generate outperformance.

They held 44% of their equity investments in shares of such firms at February-end, suffering a blow from a 1.7% drop in the BSE Mid Cap and 2% fall in BSE Small Cap indices, data from fund tracker ICRA Online showed.

The funds also invested 16% of their assets in shares of energy firms, making it their second biggest sectoral bet, and suffered as the BSE Oil & Gas index fell 3.45%.

Shares in the Indian energy major Reliance Industries, the biggest bet of Indian fund industry, fell 6.6% over the month, cutting returns from equity funds.

The index heavyweight fell as investors feared the firm would overpay for LyondellBasell. Shares recovered on Wednesday, however, on reports bankrupt Lyondell had rejected Reliance's offer

A 7.5% exposure to consumer non-durables also hurt returns as the BSE FMCG index fell 2.3%. ITC, one of top-10 preferred stock of the funds industry, fell 7.3% as the government raised the excise duty on cigarettes.

Gold, bond funds

Funds investing in share of healthcare, technology and financial firms bucked the trend to post gains in February with those betting on gold leading the pack.

A globally-focussed fund, AIG World Gold managed by AIG Global Asset Management, was the top performer among Indian equity funds in February, with returns of 5.06%.

The gold exchange-traded funds gained an average 2.4% during the month as the yellow metal rose.

On the continuous charts , gold futures closed at Rs 16,789 per 10 grams, up 2.9% in February, as domestic physical traders picked up bargains at lower levels.

Fixed income funds betting on government bonds lost 0.2% as the benchmark 10-year bond ended the month up 27 basis points at 7.86% on borrowing concern and accelerating inflation sparking fears of an aggressive rate hike.

Finance Minister Pranab Mukherjee in his budget speech last week raised gross market borrowing by 1.3% in 2010/11 to Rs 4.57 trillion. Net borrowing in 2010/11 is seen at Rs 3.45 trillion.