India funds post modest gains

Funds that invest in banking stocks attracted renewed interest after the Reserve Bank of India left its key interest rate unchanged in April, according to Lipper.
Equity funds in India posted an average return of 8.35% in April, led by portfolios with exposure to information technology, banking, metals, and real estate stocks, according to data provider Lipper. Last monthÆs performance was a reversal of the portfoliosÆ dismal first quarter.

Globally focused equity funds fared well in April, with global equities and global emerging markets portfolios posting average returns of 8.28% and 7.11%, respectively. Bond funds managed a decent performance, benefiting from the sharp drop in bond yields towards the end of the month. However, with gold prices falling sharply during the latter half of the month, gold exchange-traded funds (ETFs) delivered their worst ever monthly performance since the first gold ETF in India was launched in early 2007, contributing to the 6.29% average decline for commodities funds.

Diversified equity funds posted an average return of 8.35% in April, compared with the 10.50% return for the Bombay Stock Exchange Sensitive Index (BSE Sensex index). With blue-chip stocks posting the highest returns, only around 17% of the funds in the equity India category managed to outperform the 30-stock BSE Sensex index.

Equity funds in India still lag far behind the BSE Sensex index from the start of the year, however, posting an average loss of 22.34% in the January to April period compared with the benchmark indexÆs 14.79% decline in the same period.

The best performing sector fund category in April was equity sector banks and financials, posting an average gain of 12.74%. Banking stocks attracted renewed interest after the Reserve Bank of India (RBI) left its key interest rate unchanged in its month-end monetary policy review.

Net flows from foreign institutional investors (FIIs) into Indian equities were modest in April and totalled $266 million. Net outflows from FIIs into equities stood at $2.57 billion in the January to April period. Domestic mutual funds were net sellers in April, albeit marginally.

The Securities and Exchange Board of India, the domestic funds industry and capital markets regulator, released detailed guidelines on real estate mutual funds at the end of April. Under the guidelines, a real estate mutual fund scheme shall be closed-ended and its units shall be listed on a recognised stock exchange. The fund will have to declare its net asset value daily. At least 35% of the net assets of the scheme should be invested directly in real estate assets. The balance may be invested in mortgage-backed securities, securities of real estate or related companies, and in other securities (maximum 25% of net assets).

Dhruva Raj Chatterji, a Mumbai-based research analyst at Lipper, notes that the fourth quarter (January to March 2008) corporate results were quite robust, especially in certain sectors such as IT, telecom, and banking, which outperformed estimates and were thus re-rated. That helped boost market sentiment, he says.

However, Chatterji notes that any further monetary tightening by the RBI to combat inflation may dampen sentiment in the immediate term.

Average April performance of fund groups registered for sale in India, by asset types:

Equity India +8.35%
Equity Global +7.11%
Mixed Asset Aggressive +4.64%
Mixed Asset Flexible +3.93%
Mixed Asset INR Balanced +3.09%
Protected +1.78%
Mixed Asset Conservative +1.66%
Bond INR General +0.79%
Money Market INR +0.60%
Bond INR Government +0.22%
Bond USD +0.09%
Commodities -6.29%
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