India equity funds ride Modi rally in May, post best month in five years

June 3, 2014

India’s diversified equity funds outperformed the broader markets in May and recorded their best monthly performance in five years, as stocks rallied on hopes of an economic revival after the Narendra Modi-led Bharatiya Janata Party (BJP) won a decisive election mandate.

Equity funds clocked an average return of 11.57 percent in the month, the highest since May 2009 when funds rose 30.2 percent, data from fund tracker Lipper, a Thomson Reuters company, showed. In comparison, the BSE Sensex rose 8 percent.

Though blue-chip stocks gained, high exposure to better performers in the mid- and small-cap segment, and sectors such as financials and infrastructure, helped schemes outperform the broader markets, experts said.

“Exposure to companies in the infrastructure-related areas such as construction, engineering companies and asset owners helped these funds to outperform,” Nobutaka Kitajima, chief investment officer for equity at LIC Nomura Mutual Fund, said via e-mail.

“As the economy gains momentum, it is expected that the mid-small cap companies would benefit more than large-cap counterparts.”

A Reuters poll released on April 15 showed fund managers were growing more confident about domestic growth prospects, betting that India’s economic recovery would be supported if interest rates remain unchanged. On Tuesday, the RBI kept its key policy rate on hold.

Markets were upbeat in May as the BJP and its allies stormed to power by winning a clear majority in the general election, riding on Modi’s promises to create jobs and push for reforms to revive India’s economy from its deepest slump in decades.

Smaller shares outperformed larger peers: the BSE mid-cap index rose 15.6 percent in May while the small-cap index surged 20.3 percent. More than a third of the assets were invested in such shares by April, data from Morningstar India showed.

Sectorally, fund managers had increased exposure to industrial stocks to about 12 percent by April, the highest allocation to this sector in the last year. That underpinned funds’ performance as the BSE capital goods index and the CNX infrastructure index surged 21 percent.

Also helping funds in May was a 24 percent exposure to financial services stocks, money managers’ favourite sectoral bet in India. The BSE banking index registered gains of 15 percent.

R.K. Gupta of Taurus Mutual Fund said the sector would stand to gain if the government budget in July unveils measures to check rising bad loans that have hurt growth prospects of Indian lenders.

“Banks are always moving in tandem with economic growth. If we assume the economy will grow under Modi, then banking sector should automatically grow,” said Gupta.

Birla Sun Life Pure Value Fund emerged as the best equity diversified fund with returns of 27 percent in May, followed by Sahara Star Value Fund, which rose 24 percent.

Funds that bet on infrastructure as a theme were among the star performers — 12 of the best 30 funds in May were those focused on the sector.

Gupta, however, said these funds could underperform going ahead, with profit booking expected after the recent rally in the shares of infrastructure companies.

(Editing by Tony Tharakan; Follow Aditya on Twitter at @adityayk and Tony @tonytharakan | Disclaimer: This article is website-exclusive and cannot be reproduced without permission)

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