Equity funds' performance at worst level in 5 quarters

Trend largely attributable to the more volatile small- and mid-cap stocks

India's diversified stock funds posted their worst quarterly performance in over a year, as fund managers' bets on small- and mid-cap shares and sectors like capital goods dented unit values, data from fund tracker Lipper showed.

Such funds fell 7.5 per cent on average during the three-month period that ended in March, underperforming the Sensex's drop of three per cent by a wide margin, and registering their worst quarterly show since October-December 2011. In March, the funds registered a drop of 1.34 per cent.

Increased risk aversion hurt Indian stocks, as disappointment over the annual budget, the central bank's cautious outlook on rates and political uncertainty after a key ally withdrew from the ruling coalition resulted in shares posting their first quarterly fall in five.

However, the poor performance of funds was largely attributable to the more volatile small- and mid-cap stocks which fell much more than their larger peers during the quarter.

R K Gupta, managing director at Taurus Mutual Fund, cited pressure on margins as one of the reasons for the poor performance of these shares.

"I am afraid I don't see any immediate recovery in mid- and small-cap stocks particularly," Gupta said.

According to separate Morningstar India data, such stocks accounted for nearly 37 per cent of assets as of end-February, and their dismal performance weighed heavily as the BSE small-cap index slumped 21.3 per cent and the BSE mid-cap index fell 13.65 per cent in the March quarter.

Certain sectoral allocations also hurt overall performance.

Financials and industrials, which collectively account for more than a third of such funds' assets and are among the favourite sectoral picks, struggled during the quarter as India continued to battle slowing economic growth.

Unit values remained under pressure as the BSE capital goods index fell over 17 per cent during the period, with shares like Larsen & Toubro falling 15 per cent and BHEL losing 22 per cent. The banking index fell 9.1 per cent.

With a sluggish order book still a concern for many companies, latest industrial output data showed that India's capital goods output -- which has grown just once in the last 10 months -- fell an annual 1.8 per cent in January, highlighting the challenges faced by the sector.

Reliance Infrastructure Fund was the biggest loser in the March quarter, registering a fall of over 20 per cent, while Sahara Star Value Fund posted losses of 18.3 per cent.

Analysts believe Indian markets will trade sideways going ahead, as Euro zone concerns and domestic factors such as rising deficits and political developments loom large.

"Outlook will be very cautious ... there are a lot of irons in the fire," said Rajan Ghotgalkar, managing director at Principal PNB Asset Management Company.