There is little respite seen for equity mutual funds in the near term, with government inaction to tackle a sharp slowdown in domestic growth and a shaky global economy driving investors away from risky assets.
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 percent 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 percent.
India's economy grew an annual 5.3 percent in the three months to March, a far cry from the 9.2 percent 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 percent 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 percent in May, just off an 8 percent drop in the BSE banking index. ICICI Bank, India's No. 2 lender, fell 11.2 percent in the month, while bigger rival State Bank India shed 3.8 percent.
Automobiles were also a drag for diversified funds, which have a more than 5 percent exposure, as Tata Motors shares fell 26.4 percent 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 percent 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 percent in May and the small-cap index shed 7.3 percent.
"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 percent, while gold exchange-traded funds gained 1.2 percent.