Bank recapitalisation: Is it time to invest in banking sector mutual funds?

The government of India approved Rs 2.11-lakh-crore recapitalisation plan for the public sector banks (PSBs). This is supposed to be a positive move for the banking sector, particularly for the public sector banks. The move is expected to boost the net worth of PSBs and address the issue of write-offs. It will also enable the public sector banks to lend and grow. The banking sector funds are expected to gain from the recapitalisation of the PSBs.

“The recapitalisation move is really positive for the banks. They can lend further. There is definitely a positive sentiment in the sector after the move,” says Gopal Aggarwal, CIO, Tata Mutual Fund. “Recapitalisation is a pleasant surprise for the banking sector. The credit growth has a demand and a supply attached to it. The supply side has been taken care of but the demand side is yet to be seen. But overall, things look positive for the sector,” says Amit Premchandani, Fund manager, UTI Banking Fund.

After a phenomenal run in the last couple of years, the banking sector fund category has been languishing for a while. The category has returned -1.00 per cent in one week, -0.46 per cent in one month and -1.09 per cent in three months. A lot of fund houses had abandoned the PSBs recently.


“In general, as a fund we are also underweight on PSBs but in some schemes we are over-weight on PSBs also. Nobody was sure about the timing of this move, but nevertheless, it is a welcome move. As the situation improves, will reconsider about the investments,” says Gopal Aggarwal. “I personally don’t think the banking sector funds underperformed the benchmark. The benchmark itself has not moved. So from here, the banks have got the commitment for capital. That forms a positive sentiment for the sector,” Aggarwal adds.

Amit Premchandani believes that the recapitalisation of PSBs has already started making a positive impact in the sector. “Banking sector has been flatish for some time now. Private sector banks and NBFC are doing well whereas the public sector and corporate focus banks are doing relatively worse. Now, the tables have completely turned. Valuations are cheap in the public sector and corporate focus banks,” says Amit Premchandani.

They believe that if investors are willing to take exposure to a sector fund, banking sector is a good bet. “I think, in India, banks are an essential part of your portfolio. They form a significant portion of the sensex. Investors should have allocation to the banking sector and don’t think about timing the market. Anytime is a good time to begin,” says Gopal Aggarwal.

“The problem of capital has been solved by the recapitalisation move, but the problem of growth is still there. We are expecting returns slightly higher than the index. Around 10-15 per cent returns should be expected,” says Amit Premchandani.