Equity mutual funds lose on energy, consumer bets

A broker reacts while trading during the presentation of budget, at a stock brokerage in Mumbai February 26, 2010.

MUMBAI (Reuters) - 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 percent loss, according to data from global funds tracker Lipper.

Seven of every 10 such funds underperfored the 0.44 percent 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 percent of their equity investments in shares of such firms at February-end, suffering a blow from a 1.7 percent drop in the BSE Mid Cap and 2 percent fall in BSE Small Cap indices, data from fund tracker ICRA Online showed.

The funds also invested 16 percent 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 percent.

Shares in the Indian energy major Reliance Industries, the biggest bet of Indian fund industry, fell 6.6 percent 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 percent exposure to consumer non-durables also hurt returns as the BSE FMCG index fell 2.3 percent. ITC, one of top-10 preferred stock of the funds industry, fell 7.3 percent 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 percent.

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

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

Fixed income funds betting on government bonds lost 0.2 percent as the benchmark 10-year bond ended the month up 27 basis points at 7.86 percent 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 percent in 2010/11 to 4.57 trillion rupees. Net borrowing in 2010/11 is seen at 3.45 trillion rupees.

(Additional reporting by Siddesh Mayanker and Neha D'Silva; editing by Sunil Nair)

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