Double-digit returns in 1, 3, 5 and 10 years. Should you bet on banking sector funds?

The banking sector fund category has offered 13.98 per cent returns in one year. The top five performers in the category have given over 20 per cent returns in one year. A look at their long-term track record shows that the category has been posting good returns in one-, three-, five- and ten-year horizons. Should you bet on banking sector funds?

These schemes have given 10.50 per cent returns in three years, 9.88 per cent in five years and 10.41 per cent in 10 years. The topper in the category is Tata Banking and Financial Services Fund. The scheme has offered an eye-popping 24.70 per cent returns in one year. However, mutual fund managers believe that despite the positive outlook, the banking sector continues to face some challenges.

“We are positive on the sector in the medium and long term. Our confidence stems from the government’s visible focus on financial inclusion and providing credit and savings access on a wider scale. However, the sector faces near term challenges of consumption and investment slowdown, which could translate into lower credit growth in the near term,” says Ravi Gopalakrishnan, Head – Equity, Principal Mutual Fund.


The banking sector has been weighed down by the NPAs issue for a long time. Fund managers believe that there are signs of revival in the sector lately. The total NPAs stood at Rs 9.49 lakh crore at the end of the last financial year. The recent optimism in the banking sector is fuelled by the government announcement on infusion of capital for the recapitalisation of public sector banks. The government has also taken steps to merge 10 public sector banks into four large banks. These reforms in the sector have brought a positive sentiment for the entire segment.

“The government move on consolidation in the PSU banking space do imply long term positives including stronger governance, better risk management and cost efficiencies. But in the near term one can expect challenges in managing human resource issues and technology integration, resulting in impact on business growth,” says Gopalakrishnan.

However, fund managers believe that the long-term prospects of the sector are really bright. Sonam Udasi, Fund Manager, Tata Mutual Fund, believes that India as a market is at a very nascent stage for banking and financial services. “There is huge opportunity in terms of penetration in the banking and financial services sector. The past NPA cycle is largely behind the banking sector. I believe that the outlook is really positive and we believe that the banking sector will continue to grow at a rate which is almost 1.6 times the GDP growth rate,” says Sonam Udasi.

Fund managers say that some concerns continue to persist in the real estate and NBFC sectors, driven by lack of funding and slowdown in real estate sales. However, the quantum of the stress is smaller compared to the past cycle. Fund managers ask investors to not take exposure to banking sector funds unless they are aware about the sector.

“Sector funds by nature are more volatile than diversified funds. Banking sector is no different. In the calendar year 2018, banking sector funds saw big bouts of volatility. For retail investors it is better to take exposure to banking sector via a diversified scheme. Generally, the diversified schemes have at least 20 per cent allocated to the banking sector. You don’t need more than that if you are a retail investor,” says Sonam Udasi.

“The banking sector is a proxy on the Indian economy and provides excellent long term opportunities given that the economy is expected to grow at a much faster rate over the next 3 to 5 years. However, beware that in the short term, these schemes can be extremely volatile,” says Gopalakrishnan.