The banking sector has been facing challenges as a result of which funds focused on the banking and financial services sector have returned an average of just 9 per cent so far this year, compared to 20.5 per cent achieved by flexicap schemes.
Over the past year, banking sector funds have returned 24.8%, with mixed results. ICICI Pru Nifty PSU Bank ETF topped the list with a return of 51.9%, while SBI Nifty Private Bank ETF was left behind with a return of 11.8%.
Investors have favoured public sector banks and overlooked private sector ones.
As the banking and financial services sector is a large listed space, it has 55 passive and actively managed funds. The most recent addition is Bandhan Nifty Bank Index Fund.
Causes of slow performance
A variety of factors have contributed to the recent underperformance of the banking sector.
“Regulatory measures around loan-deposit ratio (LDR) and increased risk weighting for unsecured segments have posed challenges. Also, potential slippages in these segments have made investors cautious. Concerns over slowing credit growth have further weighed on the performance of banking sector funds,” said Roshan Chutkey, fund manager, ICICI Prudential Banking & Financial Services Fund.
“Fundamental issues include lagging deposit growth and cyclical pressures on margins,” adds Sumit Agrawal, senior vice president of equities at Bandhan Asset Management Company (AMC).
Rate cuts will have a positive impact
In the long term, banking and financial services funds are expected to perform well in an expanding economy. They will benefit from imminent interest rate cuts as well as any stimulus the economy may get from cheaper borrowing.
“The banking sector is poised for better days, especially with the expected turn in the interest rate cycle both globally and in India. Going forward, some of the best returns are likely to come from banking sector funds,” said Santosh Joseph, CEO and Founder, Refolio Investments and Germinate Investor Services LLP.
“Lower rates also improve credit and economic activity while reducing the burden of interest costs on businesses,” Agrawal says.
Attractive valuations
The period of underperformance has made some banking stocks attractively valued. “Large private sector banks are in a strong position within the banking sector. Their valuations are attractive and they have the resilience to manage potential retail asset quality challenges, should they arise,” Chutkey said.
Concentration risk
Sector funds carry greater risk than diversified equity funds.
“Investing in a single sector rather than a diversified fund carries more risk. It is advisable not to go overboard with a banking sector fund or any other sector fund,” says Joseph.
Investment strategy
Investors looking for value can consider ETFs that track indices such as Nifty Bank or Nifty Private Bank. However, long-term investors with a positive view on the financial services sector can opt for actively managed schemes pertaining to this sector.
First-time investors may find flexicap plans more suitable as they too allocate a significant portion of their portfolio to financial services stocks. As of 31 July 2024, flexicap plans had an average of 26.2% of their portfolios invested in financial services stocks.
“Given their sector-specific nature, investors can allocate 5-10 per cent of their equity portfolio to these funds,” says Agrawal.
Chutkey recommends the systematic investment plan (SIP) route.
“Retail investors should invest through SIPs rather than trying to take advantage of the market with lump sum investments,” he says.
First published: August 22, 2024 | 20:23 IS
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