Fresh investments through systematic investment route can be considered in the units of Reliance Banking Fund.
Reliance Banking is a theme fund that invests in banking and non-banking finance companies (NBFC). The fund has not only outperformed its benchmark but has also been a top performing banking fund.
It returned an annualised 36 per cent and 23 per cent over a three- and five-year period, respectively. Its benchmark S&P CNX Bank Index returned 33 per cent and 15.8 per cent annually during the same period.
Sector outlook
The valuation of the banking stocks as represented by CNX Bank Nifty is close to their four-year historic average, making these stocks attractive from a long-term perspective.
Reliance Banking fund, in line with its bank benchmark, has been a laggard in recent times due to under-performance of public sector banks.
High interest rates with tight liquidity, slowing economic growth and ballooning non-performing assets have all led to a dismal performance of the banking stocks. But these stocks have recovered over the last couple of months following the expectation of interest rate cut.
Additionally, last month's cut in cash reserve ratio and the recent moderation in the short-term rates are positives for the banks.
According to the Economic Survey, the economic growth this fiscal is expected to be slightly higher than last fiscal.
Given that the banking business growth is highly correlated to economic growth, the credit off-take may revive. The interest rate cut will also aid banks as lower rates would aid the margins and investment books. The asset-quality concerns, however, may continue to weigh on the bank stocks in near term.
A sharp fall in interest rates and significant improvement in economic activity from next fiscal (2013-14) may reverse this (asset quality) trend.
Performance and portfolio
Given this backdrop (low valuation coupled with asset quality headwinds), one can take fresh exposure to Reliance Banking Fund through systematic investment route.
In spite of sector concentration, the historical beta of Reliance Banking Fund to the broader market index CNX 500 Index is close to 1. The fund is also less volatile than its benchmark (CNX Bank; CNX Bank index's beta with CNX 500 is 1.2).
Additionally, over a five-year period, the sharpe ratio (risk-adjusted return) is higher than Goldman Sachs Banking Index Exchange Traded Scheme (passive fund which tracks the index). This indicates that active management for the fund in the past has helped deliver better returns.
While 69 per cent of the benchmark Bank Nifty's weight is split between ICICI Bank, HDFC Bank and SBI, Reliance Banking portfolio is well diversified with no stock accounting for more than 15.2 per cent of the portfolio.
The fund, however, has high exposure to nationalised banks which may result in short-term underperformance. Historically, mid-cap banks and non-banking finance companies have got higher weights in this fund.
The fund has outperformed the index more than 79 per cent of the time over each of the last five years on a rolling basis.
The period of under-performance was during the credit crunch in the markets (2008-09) and when large-cap banks led the rally, respectively.
The fund until March 2012 end was managed by Mr Sunil Singhania and Mr Shrey Loonker. From April, Mr Sanjiv Parekh and Mr Shrey Loonker will be managing the fund.
Performance will bear a close watch in this period as the fund manager has changed.