ICICI Prudential Banking & Financial Services Fund, a banking and financial services sector fund, gave the highest return of around 10.78 per cent, followed by Tata Banking & Financial Services Fund, which returned 10.04 per cent in the last three months. Quant BFSI Fund gave the lowest return of around 4.93 per cent in the same period.
Among the technology-based funds, Kotak Technology Fund returned the highest return of around 25.10% in the last three months. HDFC Technology Fund returned 23.91% in the said period. Quant Teck Fund was at the bottom of the performance table and returned 15.85% in the said period.
What elements contributed to the strong performance of these funds?
Banking and financial services sector funds
“The recent rally in bank mutual funds over the past three months has been largely driven by financial services companies, including wealth management firms, asset management companies (AMCs) and insurance companies, rather than traditional banks. These sectors have outperformed on the back of strong corporate earnings expectations and favourable macroeconomic conditions. Wealth management and AMCs have seen rising asset inflows, while insurance companies have benefited from strong corporate earnings prospects, absence of changes in taxation of insurance products in the budget and rising demand for products in a growing economy,” said Sagar Shinde, Vice President, Research, Fisdom.
He added: “Interestingly, during this period, foreign portfolio investors (FPIs) were net sellers, while domestic institutional investors (DIIs) drove the rally. The sector’s outperformance is largely attributed to bottom-up strategic stock selection within the financial services sector, rather than a broad-based surge in banking stocks.”
Technology sector funds
“Technology mutual funds have delivered strong returns in the last three months due to a combination of factors. Better-than-expected corporate earnings, consistent global and domestic demand for IT services, particularly in areas such as digital transformation, cloud computing and artificial intelligence (AI), have fueled the growth of Indian IT companies. Major acquisitions have further bolstered sentiment. Also, improved operational efficiency has led to better-than-expected margins and overall profitability,” Shinde said.
“The anticipation of global rate cuts has reinforced a positive outlook for sustained growth in technology spending. While July saw a renewal of buying by foreign portfolio investors (FPIs), the subsequent months saw a shift towards net selling by them. Notably, FPIs were net sellers till June but resumed buying in July, while domestic institutional investors steadily continued their buying during this period. These combined factors have contributed to the rally in technology mutual funds,” he added.
In the past month, banking funds lost around 0.28%, with LIC MF Banking & Financial Services Fund losing as much as 2.22%. Technology funds offered a return of 4.60%, with the highest return being 6.89%.
Will these two categories behave similarly in the future? The expert mentioned that these sectors may face volatility and investors should be cautious while making investments in these two sectors. The long-term outlook for both sectors remains positive.
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Banking and financial services sector funds
“The outlook for the banking sector in FY25 remains cautious due to several emerging challenges. Credit growth is projected to moderate, particularly in the unsecured retail segment, as RBI regulatory measures take hold amid ongoing liquidity pressures. Moreover, the implementation of new liquidity coverage ratio (LCR) norms and the possibility of lending rate cuts towards the end of the year are expected to further compress margins,” Shinde said.
He also mentioned that “the continuing stress in unsecured lending adds another layer of risk, necessitating a cautious stance in the sector. However, it is important to recognise that despite these near-term headwinds, selective growth opportunities still exist within the sector. While we maintain a neutral outlook for the sector in the near term due to these challenges, our long-term view remains positive and our confidence in the future potential of the sector is intact.”
Technology sector funds
“The IT sector is currently facing near-term challenges, characterised by subdued revenue growth and pressure on operating margins, largely due to a cautious demand environment and reduced discretionary spending. However, positive signs are emerging, especially in the BFSI sector, where demand is beginning to show early signs of recovery. The sector continues to see strong deal momentum, with an increasing prevalence of longer duration contracts, and there has been a slight improvement in the conversion of Total Contract Value (TCV) into actual revenue,” Shinde said.
“Headcount attrition has stabilised, easing supply pressures, and IT companies are focusing on improving margins through efficiency measures and optimising their workforce. While the sector may experience some volatility in the short term, the long-term outlook remains positive, driven by the ongoing digital transformation and rising demand for AI-based solutions. We anticipate improved performance in the second half of FY25, supported by a lower base in FY24 and increased newly signed deals,” he added.
After the past performance of banks and mutual funds based on the technology sector, are you looking forward to making an investment in the sector and thematic fundsWhat should be the ideal allocation that an investor should have in this type of funds?
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According to the expert, the allocation should not be more than 5-10% of total investments and these funds should constitute a small portion of the investor’s total portfolio.
“The ideal allocation of sector and thematic funds should be approached with caution due to the higher risks associated with these types of investments. It is generally recommended that such funds constitute only a small part of an investor’s overall portfolio, typically not more than 5% to 10% of the total investment. This is because sector and thematic funds are more volatile and less diversified, exposing investors to significant risks if the specific sector or theme underperforms,” Sagar advised.
Looking at the performance chart for the past three months, technology funds topped the performance table, delivering returns of up to 25%. The first four funds in the performance table were in the technology sector, followed by funds in the innovation sector and the pharmaceutical sector.
The consumption theme and infrastructure sector funds followed next. The schemes that posted negative returns were those in the international fund category, which lost up to 10% in the last three months.
Are you unsure which sector to choose to invest in now? Which theme or sector is likely to offer good returns in the future?
The expert recommends that investors currently choose the energy and infrastructure sectors, as each offers different potential.
“The infrastructure sector is set to benefit significantly from increased government capital expenditure, particularly in areas such as transportation, urban development and smart cities. Public-private partnerships (PPPs) and the push for large-scale infrastructure projects are expected to attract private capital and expertise, driving the growth of the sector. Additionally, the focus on renewable energy infrastructure and expansion of electric vehicle (EV) charging networks present long-term opportunities for investors,” according to Shinde.
“The energy sector is positioned for strong growth, particularly in the context of the global shift towards renewable energy and rising domestic demand. Government initiatives, such as the Pradhan Mantri Suryodaya Yojana and various incentives for renewable energy projects, are driving significant investments in solar, wind and other green energy sources. Sustained high global oil prices are also likely to support profitability in traditional energy sectors, while investments in renewable energy infrastructure are expected to accelerate, in line with India’s energy transition and sustainability goals,” Shinde recommended.
(Disclaimer:The recommendations, suggestions, views and opinions of the experts are their own and do not represent the views of The Economic Times)
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