Mumbai: Mutual funds are increasing their exposure to bank stocks as falling interest rates and current valuation of such scrips make them attractive. At the same time, the fund houses are raising the cash component of equity assets as they fear redemption pressures.
Data collected by domestic brokerages Motilal Oswal Securities Ltd and HDFC Securities Ltd shows that mutual funds’ exposure to banks increased to 16.6% of total equity assets in November from 14.6% in September.
Also See Attractive Buy (Graphic)
The rise in exposure to bank stocks is also because of the sharp fall in total equity assets under management (AUM) of fund houses. In absolute terms, the money invested by mutual funds in banking scrips declined to Rs15,439 crore in November from Rs19,054 crore in September.
Foreign institutional investors started pulling out of Indian stock markets in droves after the fall of US investment bank Lehman Brothers Holdings Inc. in September, which plunged the global financial system into an unprecedented liquidity crisis. The Bombay Stock Exchange’s benchmark index, Sensex, has declined 28% since then.
Following this, equity AUM of Indian mutual funds fell to Rs95,520 crore in November from Rs1.29 trillion in September.
“We are positive on banks,” said Sandip Sabharwal, chief investment officer at JM Financial Asset Management Co. Ltd, who manages Rs6,749 crore of assets. “Interest rates are coming down and this should help.”
To prop up the sagging economy, the Reserve Bank of India (RBI) started reducing its policy rate as well as the cash reserve ratio (CRR), or the amount of cash banks have to maintain with it. This led to a fall in yields on both corporate and government bonds.
On Tuesday, yields on the benchmark 10-year government paper fell to a four-year low of 6%. Bond yields and prices move in opposite directions, so a fall in yield increases the price of the paper.
“Anyone sitting on bonds would make tonnes of money,” said Puneet Nanda, chief investment officer of ICICI Prudential Life Insurance Co. Ltd, who is also positive on banking scrips. “It will have a positive impact on treasury income.”
State Bank of India is the favourite scrip with mutual fund managers who hold SBI shares worth Rs4,211 crore, followed byICICI Bank Ltd (Rs3,183 crore) and HDFC Bank Ltd (Rs1,940 crore).
Analysts said banks would also benefit from any fiscal measures that the government might take as this would lead to a rise in economic activity and improve credit offtake.
Fund managers, however, are reducing exposure in sectors such as automobile and steel, preferring to keep cash in hand. Cash as a percentage of total equity assets has increased to 21% in November from 16.13% in September.
“There are no equity inflows and fund managers are keeping this money fearing redemptions,” said Hemant Rastogi, chief executive of Wise Invest Advisors, a wealth advisory firm. “While redemption pressure has eased, there are still some people who want to exit when they see some kind of a rally.”
Graphics by Sandeep Bhatnagar / Mint