* Indian stock funds underperform broader markets in Jan
* Financials, small & midcap stocks weigh on funds
* IT funds shine as corporate earnings boost sector
By Aditya Kalra
NEW DELHI, Feb 4 India's diversified stock
mutual funds underperformed the broader market by a wide margin
in January, as exposure to financials and to mid- and small-cap
stocks hit returns, according to data compiled by fund tracker
Funds overall returned 0.45 percent during a month in which
India's 30-share BSE index rose 2.4 percent, up for a
third consecutive month on the back of continued strong foreign
net inflows and government reform measures such as allowing
diesel prices to rise.
Muted gains in financials particularly weighed on funds.
Fund managers had bet big on financials leading up to the
Reserve Bank of India policy review on Jan. 29, but a cautious
stance on further monetary easing surprised investors even as
the central bank cut interest rates.
Investment managers are more cautious this month, ahead of
India's 2013/14 federal budget to be unveiled on Feb. 28. The
government is under pressure to rein in spending and subsidies
to meet its fiscal deficit targets and avoid a ratings
"It's a very difficult call for the fund managers," said
R.K. Gupta, managing director at Taurus Mutual Fund.
"If the subsidy burdens, budgetary deficit rise, FII selling
cannot be ruled out," he added referring to foreign
(For a table of mutual fund returns, click )
The BSE's banking sub-index rose 1.6 percent in
January, dampening the overall performance of funds as the
exposure to financials had reached 26.5 percent of total assets
held by diversified stock funds as of the end of December,
according to separate data from Morningstar India.
Meanwhile, mid- and small-cap stocks lagged peers in
January, hurting performance, given these stocks collectively
accounted for nearly 38 percent of assets as of end December
according to the Morningstar data.
The BSE mid-cap index fell 2 percent, while the
small-cap index fell 4.14 percent in the month.
Funds focused on the information technology (IT) sector
emerged as the best performers in January, gaining 10 percent on
an average, as corporate earnings from Infosys Ltd and
Tata Consultancy Services Ltd boosted the sector.
(Reporting by Aditya Kalra; Editing by Jeremy Laurence)