NEW DELHI, Sept 5 (Reuters) - India's diversified equity funds posted their biggest drop since the beginning of the year in August, falling nearly as much as the broader market, as exposure to small- and mid-sized firms and sectors such as financials dented performance.
Diversified equity funds registered an average drop of 7.86 percent in the month, their worst monthly performance since January 2011, data from global fund tracker Lipper, a Thomson Reuters company, showed.
The main stock index fell 8.4 percent in August, its second straight monthly drop and the biggest percentage decline since January, as rising interest rates and global economic uncertainty dampened investor sentiment.
"Within diversified equity funds, those having higher exposure to mid-and small-cap stocks were more adversely affected during the month," said Dhruva Raj Chatterji, senior research analyst, Morningstar India.
"Equity funds having higher exposure to realty, infrastructure, IT and banking sectors also suffered during the month."
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The dismal showing in August was largely due to the underperformance of mid- and small-cap stocks, as these accounted for more than a third of equity funds' assets at end-July, Morningstar India data showed.
In August, the BSE mid-cap index fell 9.3 percent, while the small-cap index recorded a drop of 14.13 percent.
The financial sector, which accounts for more than 20 percent of assets and is one of the favourite bets of fund managers, contributed to the weak performance as well, with the BSE banking index falling 12.4 percent on worries that rising rates will hurt banks' credit growth.
Sectoral funds that invest specifically in stocks of banking firms were battered more as they fell 13 percent, making them the worst performing category of mutual funds in August.
Worries about the U.S. economy pushed IT stocks lower by 13.2 percent in the month, resulting in an average 12.8 percent drop in sectoral funds that solely invest in this sector.
Funds that invest in the yellow metal ended as top performers in August, as worries about the global economy prompted buying in the metal and pushed prices to record highs.
Gold exchange-traded funds (ETFs) garnered a return of 15.2 percent, while some globally-focused funds which invest in firms engaged in extracting, processing and marketing gold and other precious metals gained 8.1 percent on average, data showed.
On the continuous charts, India gold futures MAUc1 gained 17.3 percent to end the month at 27,184 rupees per 10 grams, after hitting a record of 28,284 rupees per 10 grams during trade on August 23.
"We are still positive on gold... there are more reasons for gold to do well than not to do well," said I.V. Subramaniam, CEO & CIO, Quantum Advisors Private Ltd.
Among debt schemes, fixed income funds investing in government securities gained 1 percent, as federal bond yields fell 13 basis points in August. (Editing by Sunil Nair)