MFs have huge exposure to banking sector

The mutual fund (MF) industry is highly exposed to the banking sector, according to the Securities and Exchange Board of India (Sebi) data.

Banking stocks accounted for 14.17 per cent of the total equity assets under management (AUM) of the industry at the end of October. Also, bank certificates of deposit (CDs) accounted for 35.23 per cent of the total debt AUM of the industry.

MFs hold close to Rs 25, 245.38 crore assets in banking stocks. The other sector to which MFs have huge exposure is industrial capital goods, which accounts for Rs 13, 731.95 crore, or 7.71 per cent, of the industry’s AUM. Software, power, pharma and petroleum stocks have also generated a huge interest from fund houses.

“The reason behind higher allocation to the banking sector is the higher weight it enjoys in various indices. A number of funds are benchmarked to BSE-100 and the BFSI (banking, financial services and insurance) sector accounts for 22 per cent weight of BSE-100. By that logic, funds may actually be underweight on banks. Banks, information technology & oil & gas carry huge weight in all indices. So, the allocation naturally becomes higher”, said N Sethuram, chief investment officer, Shinsei Mutual Fund.

“Banks are a favourite as they have had a good earnings season in the second quarter. Credit offtake is expected to pick up and their CASA (current account, savings account) deposits have been increasing, which means their borrowing costs will go down, improving their net interest margins,” he said.

Fund houses have invested Rs 204, 162.90 crore in bank CDs. A majority of this, 22.8 per cent, is in bank CDs of 90 days to less than a year. MFs’ investments in bank CDs went up sharply from 34.01 per cent of the total assets in August to 41.22 per cent in September. However, it came down to 35.23 per cent in October because of redemptions in liquid funds.

“For MFs, there are lack of options and so a large part of their money is flowing into bank CDs. Also, banks are one of the largest issuers of the paper in the market, CDs are easily tradeable, that is, they are more liquid, and having them improves the quality of the portfolio,” said the fixed income head of a fund house.

Bank CDs are offering less than 4 per cent for three months, 4-4.5 per cent for six months and 5-5.6 per cent for one year. Bank fixed deposits account for another 5.52 per cent of the total debt AUM. The number has fallen as compared to August and September due to a fall in deposit rates.

MFs continue to hold a miniscule portion in corporate debt (14.63 per cent, including floating rate bonds and non-convertible debentures), mainly due to paucity of good corporate issues and a weak corporate bond market. Fund houses have invested only 2.23 per cent of their assets in government securities. This is because G-sec yields have been rising, leading to a fall in returns. PSU bonds and equity-linked debentures account for a small part of the total industry exposure. MFs hold only 2.27 per cent in PSU bonds and 0.16 per cent in equity-linked notes.