Banking and Financial Sector The benchmark is underperforming against the index due to uncertainties on asset quality and moderate credit growth worsened by disruptions due to the pandemic. Over the past 3-5 year time period, Nifty Financial Services TRI has underperformed Nifty 50 TRI by 80-430 basis points.
But with the slowing down in credit growth and improving asset quality, some experts feel that the banking and financial sector, now offers a good opportunity for investment. investors,
Nitin Shanbhag, Head of Investment Products, Motilal Oswal Private Wealth, said, “The poor asset cycle for banks has clearly reversed in the last 4-5 years, owing to significant deleveraging from India Inc. The bank is now well capitalised. and the asset quality outlook is strong. With the private capital expenditure cycle expected to pick up by the end of this fiscal, credit growth is likely to pick up.”
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The current valuations of companies in this sector also look attractive compared to their historical averages (see table). Investing in banking and financial services sectoral funds is one way to get exposure to this sector.
overlap problem
Sectoral funds maintain a minimum of 80% exposure to companies in a specific sector.
Before you decide to bet on the banking and financial sector and invest in one of the funds in this sector, bear in mind that your investments will overlap with the rest of your portfolio.
“Since the BFSI sector has the largest weighting in the benchmark equity indices, equity mutual funds (especially large-cap and multi-cap funds) will have a major allocation in this sector,” Shanbhag said.
According to ACE MF data, actively managed large-cap and multi-cap funds have an average exposure of 32% and 21% respectively in the banking and financial services sector.
Nirav Karkara, Head of Research, Fisdom said, “Since most of the funds are oriented towards banking and financial services stocks, one should strategically allocate to this sector.
Agree with Karkera, Rishabh Desai, Founder, Rupee with Rushabh Investment Services, said, “Investors investing in sectoral funds still need to do their entry and exit well to avoid any mishaps. If the entry and exit is not well planned, one may incur losses and have to wait a long time for recovery and then generate optimum returns.”
Thus, if you feel that you cannot find an exit time to invest and cannot face the volatility that comes with sectoral funds, stay away from it. Even otherwise, it would be better to stagger your investments in these funds rather than investing any lump sum.
past performance
The rolling return analysis (between 27 April 2015 and 27 April 2022) of actively managed banking and sectoral funds reveals that most of the schemes in this category have outperformed their benchmark – Nifty Financial Services Index (TRI) – in both short and long term. Underperformed. period up to 5 years. Only ICICI Pru Banking & Fin Services Fund has managed to generate returns close to the benchmark during the said period.
In terms of downside protection, SBI Banking & Financial Services has the lowest downside capture ratio of 93%; A downside capture ratio less than 100 means that the scheme has outperformed the index during the down-market.
To avoid the risk of poor performance of the fund manager, one can consider investing in this sector by making passive investments.
There are about 16 index funds and ETFs tracking one of the Nifty Financial Services TRI, Nifty Bank TRI, Nifty Private Bank TRI, or Nifty PSU Bank TRI index.