Are you looking to bet on a possible recovery in the economy over the next year or so? Then, it may be a good time to bet on the banking sector that is likely to gain, as the growth momentum picks up.

But cherry-picking banking stocks has become a herculean task, given the developments in the sector. Public sector bank stocks have been beaten down over the last two to three years, owing to a sharp slowdown in their loan growth and rise in delinquencies. While earnings appear to be making a comeback after a dismal performance last year, it is still early days for investors to be bottom-fishing. At the same time, a few private banks after a resilient performance, appear to be losing ground in recent quarters.

Banking sector funds, which invest in a basket of banking and finance stocks, offer the solution. Of the top performing funds, ICICI Prudential Banking and Financial Services Fund has beaten its benchmark over one-, three- and five-year periods. In both market rallies as well as in volatile phases, the fund has outpaced its benchmark by a considerable margin.

The annual rolling return suggests that the fund has outperformed its benchmark over 80 per cent of the time in the last five years. Over the last one year, the fund has been very selective in upping stakes in PSU bank stocks, which is good news. Lapping up sound stocks in the buzzing IPO market has aided performance.

Investors with a long-time horizon of over five years can invest in this fund. Remember, though, that sector funds carry higher risk than other equity diversified funds, as they are linked to the cyclical ups and downs within the sector. Investors with a high risk appetite can thus invest in this fund, as a diversifier.

ICICI Prudential Banking and Financial Services Fund has made the best of market rallies and capped losses well in lacklustre markets.

Right calls

In the stupendous 2014 rally, when banking stocks turned market darlings, the fund outperformed its benchmark, the S&P BSE Bankex, by a little over 4 percentage points, delivering a robust 69 per cent return for the year. Placing bets on IndusInd Bank, PNB, DCB Bank, Union Bank and City Union Bank worked in its favour. Investing in non-banking financial companies such as Max Financial Services, Sundaram Finance, Repco Home Finance, Bajaj Finserv, etc., also raked in tidy gains.

In the lacklustre 2015 market, however, the fund cut its losses by trimming holdings in stocks such as Federal Bank, Oriental Bank of Commerce, Union Bank of India and PNB. Investments in Bajaj Finance, Bajaj Finserv, IndusInd Bank etc., helped cap losses. The fund lost 7 per cent in 2015, vis-à-vis the near 10 per cent loss in benchmark.

The past year has been a roller-coaster ride for banking stocks. In 2016, the BSE Bankex gained 7 per cent. But ICICI Prudential Banking and Financial Services Fund delivered top-notch returns of around 21 per cent.

Increasing holdings in SBI, YES Bank, Bajaj Finance and Motilal Oswal Financial Services while paring stakes in relatively low performing stocks such as Axis and ICICI Bank, has worked well.

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