* Mid-, small-cap funds, financials weigh
* Capital goods, oil & gas also under-perform
* IT funds gain, buck trend
By Aditya Kalra
NEW DELHI, March 4 India's diversified equity
mutual funds posted their worst performance in more than a year
in February, dragged down by poor returns in financials and mid-
and small-caps, according to data from fund tracker Lipper.
Indian funds fell 6.7 percent on average last month,
under-performing the benchmark BSE index's 5.2 percent
fall, and marking their worst performance since November 2011.
(For a table of mutual fund returns, click )
The weak performance in funds comes as Indian shares snapped
a three-month gaining streak in February after investors booked
profits ahead of the 2013/14 budget unveiled on Feb. 28 and
after the BSE index hit a two-year high in January.
That budget disappointed investors after the government
targeted higher revenues to finance a surge in spending,
although fund executives said shares should
"In the coming weeks to months, the markets should recover,"
said Waqar Naqvi, Chief Executive at Taurus Mutual Fund, adding
that stocks had over-reacted to the budget.
Naqvi said the budget presented by Finance Minister P.
Chidambaram on Feb. 28 was not populist, despite general
elections due next year.
"Had he gone for a populist budget, chances of India's
downgrade would have increased," Naqvi said.
Exposure to mid- and small-cap shares dragged fund
performance last month given the volatility in this segment.
Although investors had expected smaller shares to outperform
at the start of the year, weaker-than-expected corporate
earnings and concerns about funding sharply hit a segment that
according to separate Morningstar India data accounts for more
than a third of domestic diversified equity fund assets.
The BSE small-cap index slumped 12.3 percent, while
the mid-cap index fell nearly 10 percent.
Among sectoral funds, banking funds performed poorly - with
the BSE banking index falling 9.4 percent last month
- after the Reserve Bank of India surprised investors with a
more cautious outlook on monetary policy, despite cutting
interest rates as expected in late January.
India's higher-than-expected target for debt borrowing
announced in the budget could keep banks under further pressure,
according to analysts, because of concerns about liquidity.
Financials are money managers' favourite sector in India and
accounted for 27.3 percent of diversified equity funds' assets
as of end January, according to Morningstar.
Other sectors that hurt performance in February included
capital goods and oil & gas.
However, the only bright spot was the information technology
sector, which bucked the trend and rose 5.6 percent,
helping IT-sector focused funds post positive returns after
stronger-than-expected October-December quarterly results.
(Editing by Rafael Nam and Gopakumar Warrier)