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.
Such funds fell 6.7 percent on average last month, under-performing the 5.2 percent fall in the BSE Sensex, and marking their worst performance since November 2011.
The weak performance in funds comes as shares snapped a three-month gaining streak in February after investors booked profits ahead of the 2013/14 budget unveiled on February 28 and after the Sensex 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 recover.
"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 February 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.