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NEW DELHI (Reuters) - Most of India's diversified equity funds outperformed the benchmark index in April, as a significant exposure to small- and medium-sized firms and sectors like financials boosted unit values.
Such funds, which form the largest category of equity funds in India by number and assets, gained 2.72 percent on average, outperforming the BSE Sensex which inched up 0.18 percent, data from global fund tracker Lipper showed.
"As the large-cap indices became fairly valued, fund managers shifted focus to select mid- and small-cap shares, given their attractive valuations," said Chintamani Dagade, senior research analyst at Morningstar India.
Diversified equity funds had 44.5 percent of their assets in mid- and small-cap companies, according to data from ICRA Online, which helped funds as the BSE Mid-cap index gained 5.56 percent and the small-cap index rose 8.35 percent.
Two such funds -- HSBC Small Cap Fund and Escorts Growth -- emerged as top return generators, gaining 12.2 percent and 10.42 percent respectively.
Also supporting these funds was their exposure to financial services, the most favoured sectoral space of fund managers in India, which accounted for 18.4 percent of the diversified stock funds' assets at March-end.
Among sector funds, those betting on financial services returned 6.4 percent, as the BSE Banking Index gained 4.72 percent in April, with better-than-expected earnings from two of the top three banks boosting sentiments.
Experts said banks have benefitted from the buoyancy on the economic growth front and a rising interest rate scenario with credit growth set to expand should help them post decent results for next year.
"Banking looks to be a good story for next one year," said Sandeep Neema, fund manager at JM Financial Mutual Fund, whose offerings include JM Financial Services Sector Fund.
Funds betting on gold shone in April as debt crisis in Greece and certain other euro zone members increased the appeal of the yellow metal as a safe-haven investment.
AIG World Gold Fund, which bets on shares of international gold mining companies, gained 12.2 percent, whereas the category average of such funds stood at 9.13 percent.
India's gold exchange-traded funds (ETFs) gained 4.09 percent during the month on rising gold prices.
On the continuous charts, gold futures ended April at 17,125 rupees per 10 grams, up 5.09 percent during the month.
The 10-year benchmark bond rose 19 basis points in April, mainly after the government auctioned a new 10-year bond, but fixed income funds betting on government securities gained 0.54 percent, helped by higher allocation to cash, experts said.
(Additional reporting by Neha D'Silva, Editing by Sunil Nair)
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