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Mutual funds’ exposure in banking stocks, which account for almost 20 per cent of their total portfolio allocation, could be a cause of concern.
According to a recent study by Assocham, the allocation in banking stocks is despite concerns on possible erosion in bank earnings in the fourth quarter of this fiscal on the back of a squeeze in margins and rise in non-performing assets.
Mutual funds deployed nearly Rs 36,812 crore in the banking stocks in February. Their total deployment stood at Rs 1.83 lakh crore. The trend has been more or less the same for the last 12 months, the study said.
Illogical move
“Apparently overlooking the underlying stress in the banking sector, the fund managers drove movement in the bank stocks which have gained about nine per cent in the last fiscal in the market. The kind of money pumped in the banking stocks in the context of stress on their assets seems illogical,” the study pointed out.
Software and pharmaceuticals are the other two sectors attracting much of the sectors fund deployment, the study said.
In February, mutual funds investment in software sector stood at Rs 19,123 crore (10.4 per cent) while that in pharmaceuticals stood at Rs 13,544 crore (7.4 per cent of their total fund deployment in the stock market).
According to Prithvi Haldea, Chairman and Managing Director of Prime Database, there has been a huge volatility in banking stocks and an exposure of 20 per cent could be a cause of concern.
“Banks in India have Government support and they will not allow any bank to fail as in other countries. Nevertheless, 20 per cent is certainly an over exposure for any sector,” Haldea said.
What needs to be understood is whether the entire exposure is equity or does it also include debt and money market instruments.
“If it is only equity, then it could be slightly worrisome. But if it is all put together then the concern is not very great,” he said. However, mutual funds should look at the possibility of portfolio reallocation, he added.
According to Debasish Mallick, Managing Director and CEO of IDBI AMC, banking is a buoyant sector and at any point in time presents a “more compelling case” than any other sector due to its diverse exposure.
Diversified loan base
“Banks have a diversified loan base spread across sectors and geographies. This apart, banks also have an independent stream of income from treasury operations making banks a compelling case for portfolio allocation,” Mallick said.
NPAs in banking sector were a reflection of the overall economy. “It is a bit premature to be afraid of NPA in banking system. With the economy expected to recover, there could be an improvement in asset quality,” he pointed out.
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