Mutual funds increase exposure to banking, IT stocks amid outperformance

Banking and information technology (IT) stocks now make up close to 30 per cent of diversified mutual fund (MF) portfolios, with their outperformance and fresh investments pushing their weights higher over the last two months.

 

Compared to a 6.5 per cent fall in the Nifty 50 during the October-November period, the Nifty IT index rose 2.9 per cent, and the Nifty Bank index declined 1.7 per cent.

 

At the same time, stocks like Axis Bank, ICICI Bank, State Bank of India, and TCS have been among the top buys of mutual funds.

 

In their year-end outlooks, most fund houses and brokerages have shared a positive view on the two sectors. While they see valuation comfort in bank stocks, the bullish stance on IT stocks is driven by expectations of a recovery.

 

 

"Even as growth rates are converging for Nifty (broader market) and banks, the valuations have moved in an opposite direction. Banks' price-to-earnings ratio (PE) is a tad below the 10-year average at 15x. Banks' discount to Nifty 50 at 35 per cent is about 3x the average discount of 12 per cent. We continue to prefer private banks over PSU banks due to a decadal-low valuation gap and superior profitability. Valuation is attractive for the banking sector across market capitalisation," said Tata Mutual Fund.

 

Banking sector stocks saw their weight increase from 15.7 per cent to 16.5 per cent during the two-month period, shows a Nuvama Alternative & Quantitative Research report based on the investing patterns of key equity schemes of the top 11 fund houses.

 

In the case of IT, the average exposure rose from 11 per cent to 12 per cent.

 

The outperformance of IT stocks in recent months has been driven by positive commentaries from US companies, along with the expectation of rate cuts in the US.

 

Fund houses also see domestic companies benefiting from growing IT spends on emerging technologies.

 

"India's IT services sector is set to experience a sustained growth trajectory, driven by increasing investments in emerging technologies such as Artificial Intelligence (AI), blockchain, and cybersecurity. Cloud services are expected to see continued demand, positioning India as a significant global player in the technology ecosystem. The rise of generative AI is expected to be a major growth driver, with demand projected to grow 15-fold between 2022 and 2027, presenting a significant opportunity for Indian tech companies," ITI Mutual Fund said.