Lately, the banking sector has been in the news a lot, but for all the wrong reasons. First, it was the subprime crisis in the US and the apprehension of its effect on Indian banks. And then, India companies were hit by losses from credit derivatives, and the banks had to take much of the blame as the companies alleged they had not revealed all the risks associated with such financial instruments.
But, despite this negative news flow, four funds focused on the financial and banking sector have filed offer documents with the market regulator, the Securities and Exchange Board of India.
They are HSBC Banking and Financial Services Fund, ICICI Prudential Banking and Financial Services Fund, SBI Magnum Sector Funds Umbrella (MSFU) Banking and Financial Services Fund and ABN Amro Banking and Financial Services Fund.
This sudden enthusiasm seems paradoxical, considering the sector is facing several questions the world over for the way it is managed, and the hidden risks associated with some of its products. While the financial system is in chaos globally, in India it has been considerably successful in avoiding the turmoil.
If we look at the banking indices, in 2007, the Bank Nifty and S&P CNX Banks delivered 10% more return than the S&P CNX Nifty, the main 50-stock index of the National Stock Exchange. Before this, they were either underperforming or were on par with the Nifty index. Though we had banking mutual funds in India from 2003—and they were dolling out decent enough returns—only in 2007 did we see excellent returns from them.
Sadly, the banking story, too, has been affected by the recent downturn in the stock market. In the past three months, when the Nifty has just barely managed to remain in the green, the Bank Nifty has seen a freefall, giving a negative return of 19%. Only the Reliance Banking Fund has been somewhat able to hold its own—it has given a negative return of 11% for the period. The Nifty, during this period, has fallen 3%. So, the question arises: Why are we witnessing so much interest in the financial and banking sector now?
One reason could be that in the past one year, net assets of the existing banking funds have grown 24% and, compared with this, the increase in net assets of other categories has been dismal. This shows that the banking funds have been able to hold the attention of investors. JM Financial Services Sector Fund recorded a jump of 100% in its net assets in just one month last year. All these point to only one conclusion—the fund companies are responding to investors’ fondness for this sector.
Well, we are the investors, and it looks like it is time to remind ourselves of a lesson learned from the past. The launch of too many sector-specific funds could be a time to keep away from them. Remember 2001, technology stocks, technology funds, and the way they betrayed our trust.
And, just to further exemplify this point, take a look at the Kotak Tech Fund. Launched in March 2000, the fund is still struggling with a net asset value of an embarrassingly meagre Rs8.35. Learnt the lesson?
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