Equity funds lag in December; sectoral funds shine in 2010

Most of diversified equity funds underperformed the benchmark 30-share BSE Sensex in December as high exposure to mid and small-sized firms and sectors like financials hurt unit values.

Diversified equity funds, the largest category of equity schemes by number and assets, returned an average 2.08% in December, lagging the benchmark's 5.1% return, data from funds tracker Lipper, a Thomson Reuters company, showed. "Funds having higher exposure to mid- and small-cap stocks underperformed during the month, with these stocks significantly underperforming their large-cap cousins," said Dhruva Raj Chatterji, senior research analyst at Morningstar India. During the period, the BSE Mid-cap index rose 0.5%, while the BSE Small-cap Index edged 0.8% lower. Such stocks accounted for more than a third of diversified equity fund assets as of November-end, data from Morningstar India showed. Exposure to the financial space, one of money managers' favourite sectors in India, also affected returns as the BSE Banking Index lost 1.8%. Banking stocks remained under pressure in December as several banks increased their deposit rates earlier in the month, raising concerns about their net interest margins. But sector funds that bet on shares of technology firms posted average gains of 9.74%, as the BSE IT index rose 12% during the period. Performance in 2010 In 2010, mutual funds that bet on specific sectors remained star performers with consumer goods, pharma and banking-focused funds returning more than 30% on an average, according to Lipper data. Funds betting on FMCG stocks returned 36.6% in 2010, and banking funds nearly 35%. "The consumer sector did well because I think consumption has been a very good feature this time," said TP Raman, managing director of Sundaram Mutual Fund. The BSE FMCG index rose 32% in 2010, and the Banking Index clocked returns of 33.4%. SBI Magnum FMCG Fund was the top performing Indian fund in 2010, registering gains of 48%, followed by banking sector-focused Reliance Banking which gained 46%. The BSE Sensex rose 17.4% in 2010 to be among the best-performing major Asian markets, boosted by record foreign fund inflows of more than USD 29 bn. Diversified stock funds rose nearly in line with the benchmark's annual gain, with unit values recording a 17.17% gain on an average, data showed. "It's a miracle that they (fund managers) have managed to give a 15 to 16% return with the Sensex gain," Raman said, adding that managers were less aggressive in 2010. According to Morningstar India data, DSP BlackRock Micro Cap Fund topped the diversified stock funds' category with gains of more than 40%, while JM Basic Fund emerged as a laggard with losses in excess of 10%. Bond, gold funds Indian fixed income funds investing in government securities witnessed net values rise 4.5% in 2010 as rising yields during the year led to substantial capital erosion, which minimised the overall return on the funds, an expert said. The benchmark 10-year bond yield rose 23 basis points in 2010, after hitting a 26-month high of 8.22% in early December. India's gold exchange-traded funds (ETFs) returned 21.22% in 2010 as yellow metal prices scaled new highs during the year as global economic uncertainties weighed.