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While the performance has been stellar, should you enter any new or existing scheme now? “If one is bullish on the economy, banking and financial services funds should be part of the portfolio,” says Manoj Nagpal, chief executive of Outlook Asia Capital.
Though the overall outlook is bullish, there’s a catch. The difference in performance between public sector banks (PSBs) and their private counterparts, both in terms of share price and valuation, is vast. While many private lenders are expensive, trading at more than twice the book value (some such as HDFC Bank are trading at six times the book value), the number is one or even less for PSBs.
Existing MFs have scored by investing in private banks. Most banking funds have private banks such as HDFC Bank, ICICI Bank and Axis Bank as their top holdings.
Recently, SBI MF launched its banking & financial services fund, an open-ended fund. Navneet Munot, chief investment officer, SBI MF, said the fund was positioned to take advantage of any acceleration in India’s economic growth. “We did not have a banking and financial fund in our portfolio and we have filled the product gap. It’s a large sector, with opportunities not only in banking but also in wealth management, housing finance, rating agencies, broking, NBFCs (non-banking financial companies) and MFIs (microfinance institutions). The financial services space is a large part of the economy and the companies have about 30 per cent weight in the Sensex and Nifty. There would be investors who would like to be part of that,” he said.
The fund will invest at least 40 per cent in financial services companies. While there’s no clarity on whether it will focus on private banks or PSBs, investors who want to invest in these schemes now have to consider these more carefully.
“Valuations are not cheap, which is why banking funds might not be able to replicate the performance of the past year,” said Nisreen Mamaji, a certified financial planner.
Before taking a call, investors who are unsure would do well to wait and see how the fund manager invests. This will help them decide whether the scheme is investing in expensive stocks or looking at cheaper banks. While the former might be a safer investment option, the returns might be limited. In the latter case, the scope of rising is much higher once issues such as non-performing assets are resolved. On the flip side, if these problems are allowed to fester, things could worsen.
If you want to invest in the banking sector, an option is exchange-traded funds (ETFs), which mimic banking indices such as the BSE Bankex. The advantage of taking the ETF route is the expense ratios of these funds are about 50-200 basis points cheaper than actively-managed funds.
The performance of bank ETFs has been on a par with actively managed funds, at least in the past year, with four of these five ETFs beating the one-year category average returns. That one shouldn’t invest more than 10 per cent of the portfolio in sector funds goes without saying.
