Year-End Special: Passively-managed banking funds deliver superior returns in 2022

Actively-managed banking funds delivered 15% returns in 2022. The Nifty Bank Index, the benchmark for banking funds, has gained 18.62% in this year. S&P BSE Bankex total return index rose 22.62% in the same period. Among equity-oriented schemes, banking funds, including the passive ones, have been the second best performers in 2022, with 21% returns. PSU theme-based funds were ahead with close to 30% returns in the current year.

All the 31 schemes in this category offered positive returns. However, passive schemes were the toppers among banking funds. Nippon India PSU Bank BeES and Kotak Nifty PSU Bank ETF are leading the pack with over 60% returns. UTI Nifty Bank ETF, ICICI Prudential Nifty Bank ETF, Edelweiss Exchange Traded Fund-Nifty Bank followed, with 19% returns on a year-to-date (YTD) basis.

Fund managers say banking funds did well on the back of consistent earnings, stable asset quality trends along with profitability normalisation. Passive schemes, particularly have cashed in on the rally in PSU banks, and outperformed most of the benchmarks this year. Active banking funds missed out. This is because most of the active schemes have minimal exposure to smaller public sector banks.


In 2022, the Nifty PSU index rallied 63.08%. Among individual PSU Banks, Bank of Baroda shares rose by a massive 110.62%, while SBI surged 28.92%. On the other hand, Bank of India and Punjab National Bank shares gained 76.16% and 45.92% respectively. Apart from Bank of Baroda and State Bank of India (SBI), most actively-managed schemes had minimal exposure to smaller PSU banks.

Among the active schemes, Nippon India Banking and Financial Services Fund delivered the highest returns of 20%, while Taurus Banking and Financial Services Fund came close second with 18% returns, according to ACE MF data.

Generally, it has been a good year for bank financials. Almost all the banks reported growth in profitability during the September quarter, driven by surge in credit growth and reduced stress on assets. Bank credit growth, which indicates the overall health of the economy, has grown by a robust 18% in October, led by loans to MSMEs and large corporations.

Only two banking funds, IDBI Banking and Financial Services Fund and Mirae Asset Nifty Financial Services ETF, have delivered single-digit returns.

"Banking did well on the back of broad based improvement in the economy which in turn resulted in superior asset quality trends. Large banks witnessed normalisation in profitability and consistency in earnings which drove solid stock returns. Most of the fund holdings have witnessed upgrades in estimates in the last few months," said Amey Sathe, fund manager, Tata Banking and Financial Services Fund.

"We expect profitability to remain healthy for the sector driven by benign credit cost, pick up in loan growth and improving margins. Valuations remain reasonable in large cap space while in mid/small sized lenders, valuation is extremely attractive. Non lending financials too are now looking attractive on valuation basis. Overall we remain positive on the sector for 2023," Sathe said.