Capital goods help equity funds in May; bank funds struggle

Investors watch the share index at a local share trading market in Chandigarh November 12, 2008.

NEW DELHI (Reuters) - Diversified equity funds managed to perform better than the broader market in May, as exposure to sectors like capital goods and healthcare helped unit values.

Such funds, which form the largest category of equity funds by number and assets, fell 2.4 percent during the month, compared to a 3.3 percent fall in the BSE Sensex, data from Lipper, a Thomson Reuters company, showed.

Fears of further rate hikes, high inflation and worries about the euro zone debt crisis kept investors on the edge in May, as the benchmark fell for a second consecutive month.

"Funds having higher exposure to defensive sectors like pharma and FMCG outperformed during the month," said Dhruva Raj Chatterji, senior research analyst, Morningstar India.

"The decent performance by capital goods sector in May also buffered the returns of diversified equity funds".

The capital goods sector, which accounted for nearly a quarter of such funds' assets as of end-April, according to Morningstar India data, helped limit losses as the sectoral index edged up 0.4 percent.

A 6 percent exposure to cash and a 21.4 percent allocation to mid-cap shares further cushioned the fall in an overall weak market, as the BSE Mid-cap index fell 2.6 percent, but still outperformed the benchmark.

Among other schemes, fixed income funds which invest in government securities recorded a rise of 0.18 percent in May, while gold ETFs returned 1.7 percent.

BANK FUNDS DROP

Sectoral mutual funds that bet on banking stocks were hit hard during the month after the central bank raised rates by a bigger-than-expected 50 bps and hiked the savings account rate on May 3, raising worries about the banks' margins and profits.

Such funds recorded a 5.4 percent fall in unit values on an average, Lipper data showed, as the BSE Banking index fell 4 percent in May.

A series of interest rate increases by the central bank in Asia's third-largest economy triggered concerns about the loan growth outlook at leading Indian banks.

Disappointing results from State Bank of India added to the pain as India's largest lender posted a plunge in Q4 net profit and lagged estimates by a massive margin. SBI shares lost 18 percent of their value during the month.

"The sector will remain under pressure ... NPA levels will likely rise going ahead," said R.K. Gupta, managing director at Taurus Mutual Fund.

Those bank ETFs which invest in shares of public sector banks alone suffered the most , with Kotak PSU Bank ETF and Benchmark's PSU Bank BeES recording a drop of more than 10 percent.

(Editing by Sunil Nair)