India's diversified stock funds fell the most in six months in May, pulled down by banks and automobiles among others, and any chance for a rebound is unlikely after March-quarter gross domestic product growth fell to its slowest pace in nine years.
"It's going to be very, very tough," said T.P. Raman, managing director of Sundaram Mutual Fund. "Neither what the government is doing is right, nor what globally things are happening are right."
Diversified funds fell 5.65 per cent in May, their worst monthly performance since November and the third consecutive month of decline, according to data from fund tracker Lipper, a Thomson Reuters company. In comparison, the BSE Sensex fell 6.4 per cent.
India's economy grew an annual 5.3 per cent in the three months to March, a far cry from the 9.2 per cent rise in the year-earlier period. Manufacturing has contracted, fiscal and current account deficits have ballooned and the rupee has hit a series of record lows.
Many economists say the problems are self-inflicted such as the government's inability to cut subsidies, remove delays in decision-making and push reforms, rather than the external environment that the New Delhi has been blaming.
The gloomy economic outlook could pile pressure on the financial services sector, which accounted for 22.6 per cent of the assets of diversified equity funds in end-April, according to Morningstar India data.
"There will be no improvement in bank shares until there is improvement in GDP," said R.K. Gupta, managing director at Taurus Mutual Fund, warning that slowing growth could worsen bad loans and squeeze bank margins.
Banking-focused funds fell 7 per cent in May, just off an 8 per cent drop in the BSE banking index. ICICI Bank, India's No. 2 lender, fell 11.2 per cent in the month, while bigger rival State Bank India shed 3.8 per cent.
Automobiles were also a drag for diversified funds, which have a more than 5 per cent exposure, as Tata Motors shares fell 26.4 per cent in May due in part to lower-than-expected operating margins at its Jaguar and Land Rover unit.
Shares in Maruti Suzuki, the country's top car maker, also faced a bumpy ride with a steep increase in petrol prices and high borrowing costs denting sales in May.
An increase in exposure to mid-cap and small-cap companies to 37.4 per cent by end-April, the highest level since November 2010 according to Morningstar data, also backfired on the diversified funds.
The BSE mid-cap index fell 6.46 per cent in May and the small-cap index shed 7.3 per cent.
"I don't see any better things happening in the next few weeks," Raman said.
Indicating a shift to safe-havens, fixed income funds that invest in government securities saw an average rise of 1.52 per cent, while gold exchange-traded funds gained 1.2 per cent.
Copyright: Thomson Reuters 2012