Banking mutual funds under pressure amid FII selling. Should you stay away?

With the Indian market valuation relatively high compared to other emerging markets and a shift in allocation by FII could put further pressure on banks. Mutual fund experts believe that the loan to deposit ratio is currently high in the banking system and banks are facing challenges in deposit mobilisation leading to restricted credit growth.

“Indian Private Banks are more vulnerable to FII flows due to high FII ownership. With Indian market valuation relatively high compared to other emerging markets, a shift in allocation by FII could put further pressure on Banks. Loan to Deposit ratio is currently high in the banking system and banks are facing challenges in deposit mobilisation leading to restricted credit growth,” said Mayur Shah, PMS Fund Manager, Anand Rathi Shares and Stock Brokers.

According to the expert, the rising interest rates are good for NIM of the banks but after a pause in interest rate and with anticipated lower interest rate regime NIMs will be under pressure.


“Rising interests are good for NIM of a bank but after a pause in interest rate and with anticipated lower interest rate regime NIMs to be under pressure. Also unsecured asset quality can further impact the earnings,” he added.

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In the last one month, the banking sector based fund lost around 0.03%. There were around 21 funds in the said period. Helios Financial Services Fund offered the highest return of around 2.94% in the last one month.


SBI Banking & Financial Services Fund delivered 1.62% return in the same period. Invesco India Financial Services Fund gave 1.37% return in the mentioned period. Kotak Banking & Financial Services Fund posted a return of around 1.24% in the last one month.

Nine funds in the category offered negative returns in the last one month. Quant BFSI Fund lost the most at around 6.66% in the mentioned period. DSP Banking & Financial Services Fund lost 1.36%.

HDFC Banking & Financial Services Fund and Nippon India Banking & Financial Services Fund lost 0.29% and 0.02%, respectively.

After this recent underperformance, should you invest in these funds? What allocation should you make?

“As a contra call one can invest in these funds from a medium term perspective but returns would be in line with broader markets only, nothing exceptional. approx 10% to 15% max one can keep exposure,” recommended Mayur Shah.

In the last one year, these banking sector based funds have offered an average return of around 24.43% with the highest return of 33.25%. SBI Banking & Financial Services Fund offered the highest return of around 33.5%, followed by Bandhan Financial Services Fund which gave 32.99% in the same period.

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Kotak Banking & Financial Services Fund posted a return of around 25.81% in the last one year. Mirae Asset Banking and Financial Services Fund gave 22.98% return, followed by Sundaram Fin Serv Opp Fund which gave 22.54% return.

ITI Banking & Financial Services Fund and LIC MF Banking & Financial Services Fund gave 17.90% and 11.25% returns, respectively.

Will these funds continue to deliver the same performance going forward? What is the outlook for these funds?

The expert believes that looking at the US election outcome and lower chances of rate cut, the risk on NIM due to lower interest rate is reduce.Overall sector view remains neutral to mild positive and as contra call could be taken looking at its past underperformance and reasonable valuation.

“Looking at the US election outcome and lower chances of rate cut, the risk on NIM due to lower interest rate is reduced. With private capex improving demand for loan to improve however deposit mobilisation has to improve. Asset quality for private banks is a better place. Overall sector view remains neutral to mild positive and as a contra call could be taken looking at its past underperformance and reasonable valuation,” said Mayur Shah.

One should refrain from making investment or redemption decisions based on the above exercise. One should always consider risk appetite, investment horizon, and goals before making investment decisions.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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