The Banking Funds suddenly have become more attractive than ever, with the rate cut and positive signs on the revival of NPA (Non-Performing Assets). The mood is such that investors are being increasingly drawn to the sector for lucrative gains. Should you jump in? Read on.
The recent rate cut by the government ensures that the banking sector is positively influenced and there is adequate amount of liquidity in the system. The reduction in rates can provide relief to distressed companies by way of slashed interest costs, which in turn reduces NPAs. Treasury income is the income on the surplus funds invested by banks in government bonds. The rate cut can increase the treasury income of the banks, and they would be better equipped to deal with NPA situation.
Fund managers are of the opinion that the NPA situation will be improved by FY 2018, and the ones to benefit would be large PSU banks. Of course, there is no denying that private banks are going to earn a bigger bite of the market pie but the large PSUs may also show a marked improvement as compared to mid-sized and small banks.
Having said that, most fund managers place their bets on private sector banks compared to PSUs. So far, it has also been witnessed equity mutual funds that have a higher number of private banks in their corpus, have shown superior gains. These managers believe that the trend is like to continue in future too as private banks are known to adapt reasonably well to a dynamic environment. Equity mutual funds also have the knack to spot sub-segments of banking like NBFCs and housing finance, and take informed picks.
There is no doubt that banking as a sector is more diversified and all-encompassing compared to the scenario years ago. The sector is not limited to core banking functions, it extends to Non-Banking Financial Companies (NBFCs), insurance, stock markets; etc. The sector is steadily becoming less cyclical but one should keep in mind that it is still a sectoral fund.
The recommended way to enter a sectoral fund is through an SIP rather than a lump-sum investment. Secondly, sectoral funds are advised for better informed investors. So you, as a retail investor, should either use the SIP route or get in touch with a financial advisor for more information on sectoral picks.
Equity diversified funds usually have the highest allocation in banking and financial services anyway, but the banking exposure is largely limited to large banks. When you invest in a dedicated banking fund, you can benefit from significantly higher growth, because such a fund invests in mid-sized banks and NBFCs as well.
Ideally, sector funds should not make up more than 10 percent of your existing portfolio; so do not looking at banking funds as your core portfolio but a complement to your existing one.