Diversified equity mutual funds fell less than the benchmark index in July, as significant exposure to shares of mid- and small-cap companies helped limit losses.
Indian shares dropped 3.4% during the month, recording their worst monthly decline since January, as high inflation, rising interest rates and debt worries globally dampened investor sentiment.
However, diversified stock funds, which form the largest category of equity funds by number and assets, recorded an average drop of 0.72%, data from fund tracker Lipper, a Thomson Reuters company, showed.
"Mid and small-cap stocks were the saving grace for equity funds during the month," said Dhruva Raj Chatterji, senior research analyst, Morningstar India.
"Funds having higher exposure to defensive sectors like healthcare and FMCG also outperformed during the month of July, as investors continued to favour these stocks amidst a volatile market."
Mid- and small-cap shares, which accounted for more than a third of such funds' assets as of June-end, according to Morningstar India data, supported unit values as the BSE Mid-cap index gained 0.9% while the small-cap index rose 1.8%.
With money managers in India increasing their investments in shares of medium-sized firms over months, exposure to such stocks stood at its highest level since October 2010.
Among sectoral funds, schemes that invest in shares of IT companies fell by an average 3%, as the BSE IT index slipped 4.34% in July.
Growth in India's $76 billion software services sector has slowed down in recent quarters, hurt by global economic uncertainty, severe competition and rising wages.
Infosys shares lost 4.6% in July after it reported disappointing numbers for the June-quarter and gave a cautious outlook, while Wipro , which forecast growth below expectations, dropped 6.8%.
GOLD, BOND FUNDS
India's gold exchange-traded funds (ETFs) returned nearly 5.5% on an average, as the yellow metal prices surged to record highs on debt worries in the euro zone and United States.
On the continuous charts in India, gold futures <MAUc1> ended July at 23,174 rupees per 10 grams, up 5.8% for the month, after hitting a record high of 23,358 rupees per 10 grams on July 25.
"Gold is likely to move up ... this sort of return will continue in coming months," said R. K. Gupta, managing director of Taurus Mutual Fund.
Among debt schemes, fixed income funds which invest in government securities recorded a rise of 0.26% in the month of July.