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Banking funds have emerged the top performers among sectoral ones in calendar year 2016, beating other categories such as pharmaceuticals, information technology (IT), fast moving consumer goods (FMCG) and infrastructure.
Banking funds have given a one-year return of 8.7 per cent, shows data from Value Research. The only other category which has given a positive return this year is infrastructure (0.5 per cent). FMCG, IT and pharma funds have seen a decline of 1.3 per cent, seven per cent and 13.5 per cent, respectively.
In the past year, banking funds have also outperformed the general benchmark indices on the two major bourses, the Sensex and the Nifty (returns under one per cent), as well as the Nifty Bankex index (6.3 per cent).
This is despite the underperformance of these funds in the past month, due to the unexpected increase in cash reserve ratio by the Reserve Bank of India in late November and subsequent status quo on key policy rates. In the past month, the category has shed five per cent, the highest among sectoral funds.
Top performers within the category are ICICI Prudential Banking and Financial Services Fund (17.2 per cent), SBI Banking and Financial Services Fund (14.7 per cent) and Birla Sun Life Banking & Financial Services (12.5 per cent).
Banking funds invest not only in banks but the entire gamut of financial services entities -- in wealth management, housing finance, rating agencies, broking, non-banking financial companies (NBFCs) and micro finance institutions. The financial services companies contribute a little more than 30 per cent to the Sensex and Nifty weight.
“Judicious stock picking has helped banking funds outperform. Names like HDFC Bank, YES Bank and IndusInd Bank have helped prop up the returns. Investment in selective public sector names such as State Bank of India and in NBFCs such as Muthoot Finance, Edelweiss Financial Services and Ujjivan Financial Services has helped as well,” said Kaustubh Belapurkar, director, fund research, Morningstar Investment Advisor.
Analysts believe increased liquidity will lead to a reduction in cost of funds for banks. With some of these low-cost deposits turning out to be sticky, it will improve the medium-term to long-term current account and savings account ratio.
“Banks with strong underwriting and/or strong retail (meaning individual depositor) franchise might see a positive impact from an improvement on the liability side and revival in loan growth,” said a November note by Franklin Templeton Investments.
“Banks are flush with excess liquidity but the challenge will be to find suitable avenues to deploy the funds,” observed Belapurkar.
Sector funds are not for passive investors. Being cyclical in nature, one needs to be able to time the entry and exit correctly to make money, say experts.
Specific to banking funds, investors need to gauge whether the scheme is investing in expensive stocks or looking at cheaper banks. While the former might be a safer investment option, the return might be limited. In the latter, the scope of rising is much higher once issues such as non-performing assets are resolved. On the flip side, if these problems are allowed to fester, things could worsen.
