Returns from your banking funds are slipping. What should you do?

After a spectacular show in the last year, the returns from the banking sector funds slipped to negative last week and have barely managed to come to the positive side this week. The category has returned 38.24 per cent in one year, 17.79 per cent in three months, 2.85 per cent in one month and 0.30 per cent in one week. Is it a temporary blip or beginning of a long-term trend?

Amit Premchandani, Fund manager, UTI Banking Fund, says a week or a month is too small a period to judge a sector’s performance. “There are no specific reasons for the correction. When a sector is up significantly, chances of it giving higher returns in shorter time periods are less. This is because most of the returns are already captured in the last one year,” he says.

Mutual fund experts believe that the dip in the returns seems like a breather after a strong run up of the sector. “Sector rotation happens. One sector cannot continue to outperform others for a very long time. I don’t think there is any adverse change in the fundamentals. Banking sector has performed brilliantly in the past one year,” says Rajat Jain, CIO, Prinicipal Mutual Fund.


Amit Premchandani believes that lack of any resolution on NPS has been negative news for the banking sector. This coupled with other factors like change in RBI’s monetary stance have reduced return expectations. These are the reasons why Premchandani is asking the investors to mellow down their return expectations. “In the long run there will be positives backing the sector. But we cant say that the sector will perform as good as it did in the last year,” he adds.

Sure, the outlook for the banking sector is positive, but investors should not take a large exposure in banking sector funds. Rajat Jain asks existing investors not to panic because of the short-term dip in returns and stay invested. He asks new investors to use these funds only for diversification.

“Sector funds cannot be the core part of your mutual fund portfolio. They are meant for diversification. If you have the knowledge about a particular sector and you want to play it, you should invest in it. Otherwise, stick to diversified funds,” says Rajat Jain.