To nobody's surprise, equity funds had a rollicking time in 2003. While enough has been said about the blistering market rally of the past year - now showing signs of flagging - the performance of equity funds tells a story of outperformance compared to the benchmark indices.

More than 75 per cent of equity funds performed better than the BSE Sensex last year, with top performing funds giving returns well in excess of 150 per cent.

Even funds lagging at the bottom of the pile have managed returns of more than 30 per cent in 2003.

As an investment class, equity funds posted average returns of 93.50 per cent in 2003, much better than the 72.89 per cent recorded by the Sensex and 71.90 per cent by the S&P CNX Nifty.

Unlike previous boom times there is a difference this time though. Fund managers have used vastly different routes to take their investors to the promised land. (Read: variety in investing approach).

It is no longer a case of putting all your eggs in one basket as was the case the last time equity funds performed well in 1999-00. At that time fund managers stayed with the then market darlings - IT scrips.

Last year though, they were much more innovative, ignoring pre-conceived notions and exposing their assets to a variety of sectors and stocks.

Needless to say, diversified funds took the top honours last year, leaving their sectoral compatriots far behind.

The 'diversified' way to the top

Equity diversified funds, Templeton India Mutual Fund's Franklin India Prima Fund (177.13 per cent), Tata Mutual Fund's Tata Equity Opportunity Fund (164.23 per cent) and Birla Equity Plan (160.95 per cent) of Birla Sun Life Mutual Fund were the top three performers for the year.

HSBC Mutual's HSBC Equity Fund (160.25 per cent), Sundaram Mutual Fund's Sundaram Select Midcap (157.73 per cent) and two growth schemes from the stable of Reliance Mutual Fund - Reliance Growth (155.66 per cent) and Reliance Vision (155.16 per cent) - were the other top performing funds apart from Alliance Capital's Basic Industries Fund (154.16 per cent).

While it is easy to say that a secular bull run in the markets has helped mutual funds improve performances in 2003, one also has to take note of the prudent investment decisions made by funds over the last year.

Fund managers seem to have veered more and more towards mid-cap stocks in 2003 considering their prolific run last year (the CNX midcap 200 index appreciated by 134.72 per cent in 2003).

They have also started venturing out of usual heavyweight sectors such as pharma, auto, oil & gas and IT and have taken a liking to hitherto marginal sectors such as capital goods, auto ancillaries, textiles and fertilisers and chemicals.

A look at the latest portfolios of these funds has its own story to tell.

While Franklin India Prima Fund had maximum exposure to the auto sector (13.61 per cent), followed by banks (11.28 per cent), the next few slots are occupied by auto ancillaries (10.74 per cent), consumer finance (7.82 per cent), fertilisers and chemicals (5.36 per cent) and apparel and accessories (4.78 per cent).

Another top performing fund - Reliance Growth Fund - has also pitched in its lot with previously unglamorous sectors.

While the fund's top holding is in the steel sector (9.29 per cent), chemicals (8.29 per cent) and electrical equipment (8.27 per cent) have also managed to find a place at the top.

The equity boom also helped equity-oriented tax saving schemes generate handsome returns in 2003.

These schemes, with a three-year lock-in period, offer concessions under section 88 of the Income-Tax Act and invest heavily in equity.

Schemes such as Prudential ICICI Tax Plan (150.35 per cent), Tata Tax Savings Fund (138.26 per cent), HDFC Tax Plan-2000 (138.08 per cent) and HDFC Tax Saver (121.06 per cent) were among the leading performers in 2003.

Sectoral, index funds struggle

While active fund management has definitely helped the fortunes of diversified funds, the opposite applies to sector funds.

Generally, sector funds have struggled to beat the broad market in 2003.

Most of the leading sector funds languished mid-table, though some of them did manage to beat their respective indices.

For instance, SBI Magnum Sector Umbrella Fund has given a return of 117.95 per cent compared to the BSE Health Care Index's return of 95.79 per cent in 2003.

Tata Mutual's Life Sciences and Technology Fund also chipped in with an annual return of 120.45 per cent. FMCG sector funds like Prudential ICICI FMCG Fund (59.23 per cent) and Franklin FMCG Fund (47.37 per cent) managed to beat the BSE FMCG index which appreciated by 35.40 per cent.

What about index funds? There were a few who did manage to beat their benchmark indices, but others have been found wanting. UTI Index Equity Fund (83.35 per cent), HDFC Index Fund - Sensex Plus Plan (77.6 per cent) and Benchmark Mutual Fund's Nifty BeES (75.45 per cent) outperformed the indices, albeit marginally.

However, other index funds like the FT India Index Fund - Sensex (64.66 per cent), HDFC Index Fund - Sensex Plan (63.91 per cent) and LIC MF Index Fund - Nifty Plan (57.20 per cent) have managed to give returns lower than their respective benchmarks.

Which brings us to the laggards of 2003 - the technology funds.

It is not surprising that IT sector funds have found the going hard.

While many IT sector funds managed to beat the BSE IT Index (annual returns in 2003 - 23.48 per cent), that is small consolation for investors who saw the rest of the market taking wing.

There were also contrasting performances within the group. The UTI Growth Sector Fund - Software (47.74 per cent), SBI Magnum Sector Umbrella - Infotech (47.52 per cent), Kotak Mahindra's K Tech Fund (37.43 per cent) and Templeton's Franklin Infotech Fund (37.43 per cent) were among the IT funds languishing near the bottom; DSP Merrill Lynch's Technology.com Fund (66.67 per cent) and Prudential ICICI Mutual Fund's Technology Fund (65.29 per cent) were the ones who managed respectable returns during the year.

The Sharpe edge

Astronomical returns may be one thing, but how have the top equity funds performed when it comes to balancing returns achieved compared to the risks undertaken?

Not bad really. Apart from tax savings schemes, leading equity funds of 2003 have also done well in the Sharpe test.

The Sharpe ratio, a measure that assesses performance that's adjusted for risk, is commonly used for the selection and comparison of mutual funds. The higher a fund's Sharpe ratio, the better its returns relative to the risk it has taken.

A look at the Sharpe ratios of top funds like Franklin India Prima Fund (0.32), Reliance Vision (0.32), Tata Equity Opportunity Fund (0.31) and HSBC Equity Fund (0.31) indicate that they are among the topdogs in the risk-return measure as well.

Technology sector funds have the dubious honour of providing the least returns relative to the high investment risks they have undertaken.

Sun F&C Emerging Technology Fund (0.06), Franklin Infotech Fund (0.06), Kotak Mahindra K Tech Fund (0.06) and Prudential ICICI Technology Fund (0.1) were among the worst in this category.