Reading banking funds' performance

It may be smarter to hold individual stocks than funds or have a mix of both

Investors in banking funds would be wondering what hit them. Many would have entered these funds in anticipation of a lower interest rate regime that favours the banking sector in two ways – better treasury incomes due to lower yields and higher credit offtake.

However, both have not fructified. Yields have not softened to the extent of rate cuts by the Reserve Bank of India (RBI) credit offtake is still languishing below 10 per cent.

The returns from these funds, as a result, have been quite disappointing. While the benchmark indices – the S&P Sensex and Nifty – are down less than two per cent in the past year, the category average returns of banking funds is down 11.40 per cent – the worst among all mutual funds schemes. And there are schemes, primarily public-sector bank focused ones that have wiped out your principal by one third.

The story does not end there. There are banking stocks, both in mutual fund schemes and Sensex/Nifty, which have been remarkable performers. For instance, HDFC Bank, IndusInd Bank and Kotak Mahindra Bank are up seven per cent -17 per cent in the past year. And over a five-year period, most private sector banks have given double-digit returns on an annualised basis.

The problem lies with the public sector banks that are plagued by non-performing assets and hence, bringing down the entire performance of the banking sector. Consequently, the jury is still out whether one should investors should buy an omnibus like a banking fund, which includes both public sector and private sector banks or they should go out direct stocks which has its own risks.

Hemant Rustagi, CEO, WiseInvest Advisor, says, “I agree that some banking stocks have not been doing well for quite some time. That is why, sector funds are recommended for those investors who understand the market and go through the portfolio before investing.”

He feels that the one can buy a few good banking stocks and supplement it with banking funds in a 70:30 ratio. “This will help investors when there overall growth in the banking sector because the particular stocks in the portfolio may not always do well,” he says, adding such strategies are likely to work when the investor can time the market as well.

Industry experts say since the turnaround in the economy is still to happen, things will not change in the banking sector in a jiffy. Even RBI Governor Raghuram Rajan has set the deadline for resolving non-performing woes of the banking sector to March, 2017.

From an investor’s point of view, what is worrisome is that even over a five-year period, the category average returns of the banking funds has underperformed the Sensex and Nifty with returns of 4.83 per cent annually. Both the benchmark indices have given better annual returns at five per cent and 5.3 per cent, respectively. These funds have done worse than the CNX banking index, which has returned 7.13 per cent annually. It is only over 10 years that these schemes have bettered the benchmark indices. From a financial planning perspective, however, Kartik Jhaveri, director, Transcend India, believes that investors should have a separate stock and mutual fund portfolio. “If we are looking to invest 30 per cent in sectoral funds, banking, infrastructure and pharmaceutical funds come in. From a stock perspective, I would definitely go for good private sector banks.”