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19% returns in three months; is it time to bet on banking sector mutual funds?

The toppers in the category have offered around 23 per cent returns in both three months and one-year horizon.

, ET Online|
Updated: May 30, 2019, 02.59 PM IST
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Banking sector mutual funds are the talk of the town these days. These sector schemes have been offering exceptional returns in the short term: 6.09 per cent in one month, 19.17 per cent in three months, and 15.43 per cent returns in one year. The toppers in the category have offered around 23 per cent returns in both three months and one-year horizon. Investors are asking whether the performance is going to last or will it be short lived?

Fund managers believe that the outlook for the banking sector has definitely improved in the last one year. “In the near term, for the private banking space, competition landscape has become better. NBFCs have become weaker and PSU banks are struggling. The woes of asset quality are behind the large private sector banks. They don’t have a dearth of capital and this has helped the run up in the banking segment,” says Sonam Udasi, senior fund manager, Tata Mutual Fund who manages the Tata Banking and Financial Services Fund

The return of Modi government has improved the sentiment in the market and it has given an extra push to these funds in the last one week. The BSE Bankex Index has jumped 1,360 points since the election results showed the return of the BJP government at the centre. However, fund managers believe that the momentum is unlikely to continue. “Definitely a strong government has pushed the indices up but the NAVs of the banking sector funds were already very strong. This push has just been additional,” says Jimmy Patel, CEO, Quantum Mutual Fund.

The liquidity problems and the NPA issues might be partially behind the sector but mutual fund managers believe that it might continue to haunt the sector in the coming months. The Reserve Bank of India (RBI) on Friday proposed introducing a liquidity coverage ratio (LCR) for large NBFCs to help tackle liquidity problems in the NBFC sector.

“We have seen exceptional performance by the sector but we have to think about the issues that are lying under the carpet. The NPA issue is still not completely over for many banks, the PSU banks are struggling, there are investments in housing finance companies, NBFCs etc which will hit the banks when the lending process from the banks starts again,” says Jimmy Patel.

With all these issues on the table, the fund managers still believe that the sector has the potential and these funds might reward investors who can take risk. “We believe that the large private sector banks will have a good run up in the next two to three years because of the weak competition. Even if the credit growth were to remain lower, they will take an incrementally higher market share. It may be volatile but the sector will remain positive for the coming years,” says Sonam Udasi.

However, for retail investors, the advice remains the same- do not go for sector funds if you can’t take extra risk. “We have always advised retail investors to take exposure to the sectors via their multi cap or regular equity schemes. You should think of investing in sector funds only if you are aware of the sector and want to take positions,” says Jimmy Patel.

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