Smaller-cap stocks help mutual funds in February

Diversified equity funds posted better returns than the Sensex in February, helped by small and medium-sized stocks that rose on increased foreign and domestic buying.

Diversified funds, the largest category of stock funds in India by number and assets, returned an average 4.8 per cent in the month, according to fund tracker Lipper, a Thomson Reuters company.

These funds outperformed the benchmark index, which rose 3.25 per cent on robust inflows from foreign institutional investors (FIIs) and hopes of easing monetary policy.

Favourable global liquidity conditions encouraged foreign investors to buy more than $7 billion of Indian equities so far in 2012, pushing up the index by more than 14 per cent.

“With the backing of FIIs, retail participation increased in mid- and small-caps, which pushed them higher,” said R K Gupta, managing editor at Taurus Mutual Fund. “However, the outlook for these shares is likely to be cautious going ahead.”

Mid- and small-cap shares accounted for more than a third of the assets of diversified funds at the end of January, and holdings of such stocks rose to the highest level since January 2011, Morningstar India data showed.

During the month, the BSE mid-cap index rose 8.8 per cent while the small-cap index gained 6.14 per cent.

Exposure to the financial services sector — the top sector bet for money managers, with an allocation of over 20 per cent — also helped equity diversified mutual funds as the Bombay Stock Exchange banking index rose 5.12 per cent.

Shares of top-lender State Bank of India gained 9 per cent, while HDFC Bank rose 5 per cent on hopes the central bank will further reduce the cash reserve ratio for banks to help ease tight liquidity conditions.

Two diversified funds from HSBC, the HSBC Midcap Equity Fund and the HSBC Progressive Themes Fund, were India’s top performing mutual funds in February, returning more than 11 per cent.

Among sectoral funds, those focusing on technology returned more than 7 per cent while those investing in financial services registered a rise of nearly 6 per cent.

IT stocks were among the best performers in February, pushing up the BSE IT index by 6.6 per cent.

“IT companies offer a significant value proposition to their international clients and offshoring of services will increase over a period of time,” said Nilesh Shetty at Quantum Asset Management Co. “This will augur well for the sector.”

Fixed income funds that invest in government securities rose 0.75 per cent in the month, as the yield on the benchmark bond fell 7 basis points.

Gold exchange traded funds (ETFs) rose a little more than one per cent on an average in the month.