Equity funds focusing on consumer goods and healthcare companies topped the performance charts in April, and the country's struggling economy is set to drive more investors to the defensive sectors.
Growth in Asia's third largest economy has been slowing, fiscal and trade deficits have widened sharply and the inability of the government to push key reforms such as cutting subsidies and opening up the economy have dented investor confidence.
Still, in the country of more than 1.3 billion people demand is seen strong for daily use consumer goods like soaps, toiletries and food as well as pharmaceutical products.
"Consumption is on track and these sectors will continue to do very well," said T P Raman, managing director of Sundaram Mutual Fund. "All other sectors are impacted by one thing or the other."
Fast moving consumer goods (FMCG) funds gave an average return of 8% in April, shining for a second consecutive month, while healthcare funds chipped in 3.6%, data from fund tracker Lipper, a Thomson Reuters company, showed.
The SBI Magnum Sector Funds Umbrella-FMCG fund was the best performer, posting a 9% return in April.
The returns were better than the BSE FMCG index's 6.2% gain and the healthcare index's 2.6% rise in April.
Shares in ITC, the largest cigarette maker in India, surged 8.2% in April, while the leading consumer goods maker Hindustan Unilever Ltd rose 1.8%.
Hindustan Unilever, which reported a 21% rise in quarterly net profit on Tuesday helped by higher volumes and prices, sees strong consumer demand continuing despite risk of input cost pressures and currency fluctuations.
In comparison, the BSE Sensex slipped 0.5% in April with investor sentiment undermined by regulatory risks and lack of clarity about budget proposals to tax foreign portfolio investments.
Standard & Poor's cut India rating outlook to negative from stable, reflecting the toll that hefty fiscal and current account deficits and political paralysis are exacting on the economy.
India is faltering as an investment destination because of significant policy mistakes and stock prices there will slide if the nation's credit rating is cut, Mark Mobius, one of the world's best-known emerging market investors, said on Tuesday.
DIVERSIFIED EQUITY, OTHER FUNDS
Diversified stock funds, the largest category of equity funds in India by number and assets, fell nearly 1% in April with their near 11% exposure to information technology (IT) weighing down, data showed.
IT funds showed an average 4.4% drop in returns, while the BSE IT index fell 6.2%, with Infosys plummeting 14% and Wipro sliding 8%.
Financial services, which account for more than a fifth of such funds assets and is the fund managers' top bet according to Morningstar India data, posted small gains.
The BSE banking index rose 0.7% in April, with investors cautious about the outlook and banks reluctant to cut rates due to tight liquidity conditions after the Reserve Bank of India (RBI) slashed rates by 50 basis points.
Among other schemes, gold ETFs registered a rise of 2.8% as the yellow metal rose in April on the back of uncertain global economic outlook.
Gold futures hit a five-month high of Rs 29,293 per 10 grams on May 1.