Stubborn interest rates, slowing growth and sticky inflation at the dawn of 2012 is a heady mix for disaster in the stock markets, one would have thought. In the end, what a party it turned out to be!

Perceived reform measures and expectations of improving sentiment drove the Sensex up by 25 per cent this year (January 2-December 26,). What is more, if you owned mutual funds, you had an eight out of ten chance of beating the Sensex hollow!

Diversified equity funds, on an average, gained 32.3 per cent in 2012, outsmarting the bellwether by about 7 percentage points. With the broader markets (BSE 500) clocking a 30.7 per cent return, half of the 182 diversified funds outperformed too.

Three cheers for mid-caps

With eight of the top ten performers in the diversified category being mid-cap funds, this theme won hands down in the 2012 rally.

Principal Emerging Bluechip got the crown with 54.3 per cent returns. Two-thirds of the mid-cap funds outperformed the BSE/CNX Mid-cap index while almost all the mid-cap funds bettered the Sensex/Nifty returns.

For most of these winners, stocks from the banking, consumer non-durables and pharma sectors have been top choices during the year. A tilt towards mid-cap funds is what makes this rally different from the one in 2010. The upswing then saw a mix of dividend yield funds, large-cap oriented funds, mid-cap and MNC funds topping the charts.

Hurrah for banking

After losing out badly in the 2011 market fall, banking funds came back with a vengeance this year.

With the BSE Bankex/CNX Bank Index bagging 56 per cent returns, funds such as ICICI Pru Banking and Financial Services, Reliance Banking Religare Banking and UTI Banking gained 57-71 per cent this year, beating the best performing diversified funds.

Cuts in cash reserve ratio, expectations of improved credit offtake and a rise in asset quality fuelled the rally in banking stocks. Private bank stocks led the race even as public sector banks lagged owing to recurring bad loan problems.

pooh-pooh for dividend yield

A winning theme of the 2010 rally, but a laggard this year, is ‘dividend yield’ funds. Barring Principal Dividend Yield, none of the other six funds has beaten the BSE 500/CNX 500 returns.

This is in contrast to 2010 when all dividend yield funds outdid the broader indices by 5-15 percentage points. Given that risk-taking has been the predominant theme in this rally, a defensive theme like dividend yield may not have found market favour.

New funds on a song

Out of the 21 equity funds that have a track record of between one and three years, 12 funds, or almost 60 per cent of them, have bettered the Sensex returns.

Eight of these funds managed to beat the returns of the broader indices as well. This implies that newer funds have participated well in the current rally. New funds that find a place among the top 20 performers of 2012 are Axis Midcap and Mirae Emerging Bluechip.

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