Equity scheme investors to breathe easy as banking, financial firms rally

M-cap of 11 banks and financial firms on the Nifty50 is up 24 per cent since September, boosting NAVs of large diversified equity schemes

Equity mutual fund (MF) investors can expect better performance from their schemes as banks and financial companies are back to being rally leaders from being laggards for the better part of the current calendar year.

Top stocks in the financials space are the No. 1 bet for MF managers. A poor showing by them in the first nine months of the year had hit the performance of most diversified large-cap funds.

This is now about to change. The combined market capitalisation (m-cap) of 11 banks and financial companies, including companies that are part of Nifty50 index, is up 24 per cent since the end of September this year, against a 10 per cent rise in the benchmark index during the period.

These banks and financial companies had a combined m-cap of Rs 27.5 trillion as of Friday’s close, against Rs 22.2 trillion at the end of September.

The rally has resulted in a sharp increase in the sector’s weighting on the index. Banks and financial companies now account for nearly 37 per cent of the index, up from 32.6 per cent at the end of September and a three-year low of 32.5 per cent at the end of July.

The analysis is based on the shareholding pattern of index companies at the end of September this year and the market value of MFs’ stake at the end of Monday’s trading.

Analysts see more upside in the segment, further augmenting the net asset value of equity MFs, given their huge exposure to the top stocks in the financial sector.

“There is more steam left in the banking stocks since most of them hardly participated in the rally after the March lows. They are now likely to make up for it by outperforming the broader market for some time. This will boost the performance of equity MFs, given their large exposure to the sector,” says Dhananjay Sinha, head research, Systematix Institutional Equities.

MFs are the largest non-promoter shareholders of financial stocks after foreign portfolio investors. At the end of September this year, MFs had 13 per cent stake in the financial stocks.

MFs’ stake in these 11 index stocks was worth Rs 3.53 trillion on Monday’s close. This is equivalent to nearly 30 per cent of the combined assets under management (AUM) of all equity schemes.

According to the data from the Securities and Exchange Board of India, the total combined AUM of all equity-oriented schemes was around Rs 11.6 trillion at the end of September this year.

Despite such a large exposure, most large equity schemes remain underweight on the financial sector, compared to the sector weightings on the benchmark indices.

“MF schemes are expected to raise their financial sector stocks to align their portfolio with the change in the index composition. This may also boost the funds’ performance,” adds Sinha.

Others, however, say the performance boost from financial stocks could be shortlived for MF investors, given the uncertainty plaguing the industry.  

“Many lenders reported good numbers in the second quarter of 2020-21, solely because they didn’t have to report bad loans, thanks to the Supreme Court. But then it raises the question mark over their earnings in the forthcoming quarters,” says G Chokkalingam founder and managing director, Equinomics Research & Advisory Services.

He sees earnings headwinds in the sector, given the sharp slowdown in credit growth.

“Overall non-food credit growth is now down to 6 per cent, while deposits are up 10 per cent. Credit to the industry is flat. These will have an adverse impact on their earnings growth in the second half,” cautions Chokkalingam.

That may well be the case. Right now, MF investors can breathe easy after a tough year.