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The banking and financial sector has been underperforming against the benchmark index on the back of uncertainties over the asset quality and the moderate credit growth worsened by pandemic-led disruptions. In the last 3-5 year time period, the Nifty Financial Services TRI has underperformed the Nifty 50 TRI by 80-430 basis points.

But with the slow pick-up in credit growth and improving asset quality, some of the experts believe that the banking and financial sector, now, offers a good investment opportunity to investors.

Nitin Shanbhag, head of investment products, Motilal Oswal Private Wealth said, “The bad asset cycle for banks is clearly in the reversal over the last 4-5 years on account of significant deleveraging of India Inc. Banks are now well-capitalized and the asset quality outlook is robust. With the private capex cycle expected to pick up towards the end of this fiscal, loan growth is likely to witness momentum."

 

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The current valuations of the companies in this space, too, look attractive compared to their historical average (see table). Investment in the Banking and Financial Services sectoral funds is one of the ways to get exposure to the sector.

Overlaps issue

The sectoral funds maintain minimum 80% exposure to companies in the specific sector.

Before you decide to take a bet on the banking and financial sector and invest in one of the funds in this space, pay attention to the overlap your investment would have with the rest of the portfolio.

“Since the BFSI sector has the largest weight within the benchmark equity indices, equity mutual funds (especially large-cap and multi-cap funds) would tend to have a sizeable allocation to this sector," added Shanbhag.

As per the data from ACE MF, the actively managed large-cap and multi-cap funds have an average exposure of 32% and 21%, respectively, to the banking and financial services sector.

“Since most funds have a reasonably heavy orientation towards banking and financial service stocks, one must tactically allocate to the sector," said Nirav Karkera, Head of Research, Fisdom.

Agreeing with Karkera, Rushabh Desai, founder, Rupee with Rushabh Investment Services, said, “investors venturing into sectoral funds still need to time their entry and exit well to avoid any mishaps. If the entry and exit is not well planned, one may have to bear losses and also have to wait a long time towards recovery and then generate optimum returns."

Thus, if you think you cannot time the exit well for the investments and cannot withstand the volatility that comes with sectoral funds, stay away from it. Even otherwise, one will be better of staggering their investments into these funds rather than any lumpsum investment.

Past performance

A rolling return analysis (between 27 April 2015 and 27 April 2022) of the actively managed banking and sectoral funds reveals that most of the schemes in this category underperformed its benchmark - Nifty Financial Services Index (TRI) – both in the short and long-term of up to 5-years. Only ICICI Pru Banking & Fin Services Fund has managed to generate returns closer to the benchmark during the said period.

In terms of downside protection, SBI Banking & Financial Services has one of the lowest downside capture ratios at 93%; the downside capture ratio of less than 100 means the scheme outperformed the index during the down-market.

To avoid the risk of fund manager underperformance, one can also consider taking exposure to the sector by investing passively.

There are about 16 index funds and ETFs tracking one of the Nifty Financial Services TRI, Nifty Bank TRI, Nifty Private Bank TRI, or Nifty PSU Bank TRI indices.

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