The banking sector is on a roll these days. The Nifty Bank Total Return Index (TRI) is up 20.6 percent year-to-date (YTD). The Nifty PSU Bank TRI has clocked a blockbuster gain of 55.7 percent YTD. Actively-managed banking and financial services funds are up 10.9 percent on average YTD.
According to a report by Business Standard, the improved performance of banking and financial services funds can be attributed to positivity in all the factors that drive the performance of banking stocks: growth, profitability, asset quality and balance sheet strength.
Credit growth is improving and is expected to remain strong in the near future, noted the report.
Ravi Gopalakrishnan, chief investment officer-equity, Sundaram Mutual told BS that pick-up in manufacturing, rise in system capacity utilisation, and emerging signs of private capex in several sectors augur well for a revival in corporate credit growth.
He added that banks’ margins are improving and are also facing lower credit costs as their asset quality has improved and they have to provision less for non-performing assets (NPAs).
However, the report pointed out that the banking and financial sector faces risks emanating from macro factors like the sharp global slowdown, rupee depreciation, and systemic liquidity constraints.
Interest rates in India are rising. While the Indian economy is in a relatively better shape, consumer balance sheets are not yet in the best of positions to absorb higher rates, it further stated. With inflation still at elevated levels, the US Federal Reserve may find it difficult to implement easing measures quickly, added the report.
It noted that despite the outperformance, the one main risk of investing in a banking and financial services fund is of overexposure. “Financials are already well represented with an exposure of 30-40 percent in most diversified-equity funds and at the index level. If you take an additional tactical exposure, you could end up with 45-50 percent exposure to financials,” said Arun Kumar, head of research, Fundsindia.com.
Another risk, as per the report is that the banking and financial sector tends to take a big hit in the event of an economic slowdown or a market crisis.
In view of the existing macro risks, Roshan Chutkey, senior fund manager, ICICI Prudential Mutual Fund suggests selecting an active fund whose manager has a proven track record of managing risks.