Mutual Funds

Why banking funds are a good addition to your portfolio

Radhika Merwin | Updated on December 10, 2019 Published on November 30, 2019

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You can consider investing in these funds for their strong long-term performance

While most banking stocks have delivered a rather jaded performance recently, banking sector funds have had a splendid run. So much that these schemes have outperformed diversified equity funds over the long run. Investing across a wide spectrum of the sector — banks, NBFCs, housing finance companies, insurance, rating agencies — has helped them deliver healthy returns across time periods.

Over the past year, while diversified equity large- and multi-cap funds delivered 6-13 per cent category returns, banking funds, on an average, delivered a tidy 23 per cent return. Even over longer three-, five- and 10-year periods, they have managed to outshine diversified equity funds.

There are currently 13 funds in the category, of which six have a 10-year track record, while nine have a five-year track record. Funds such as ICICI Prudential Banking and Financial Services, Nippon India Banking, Invesco India Financial Services, Sundaram Financial Services Opportunities and UTI Banking and Financial Services have a 10-year track record.

Considering the long-term performance — measured by rolling returns and the underlying risk — as determined by Sortino Ratio, our BusinessLine Portfolio Star Track Rating ranks ICICI Pru Banking (5-star rating) and Invesco Financial (4 star rating) as the top performers within the category. These funds have delivered 17 per cent and 15 per cent compounded annual returns, respectively, over the past 10 years.

Diversity across sectors

While sector funds, in general, are riskier than other diversified equity funds, banking funds having a wider choice of sectors to invest in — banking, insurance, asset management companies, NBFCs, rating agencies and exchanges — may have a relatively low concentration risk. Given the healthy performance of these funds across cycles, it may be a good idea to invest a portion of your corpus in them to jazz up the returns of your portfolio.

Top performers

ICICI Pru Banking and Financial Services has been a top performer over the long run. However, the fund has lost steam over the past year, delivering about 21 per cent returns, when its peers such as Tata Banking and Financial Services, SBI Banking & Financial, Sundaram Financial Services Opportunities and Invesco India Financial Services have delivered 25-26 per cent returns.

For ICICI Pru Banking, holdings in stocks such as Karur Vysya Bank, Karnataka Bank, South Indian Bank, that fell sharply over the past year, have likely weighed on its performance. But its other bets such as ICICI Pru Life, SBI Life, ICICI Lombard and CreditAccess Grameen have done splendidly.

Given the fund’s healthy long-term track record, investors can consider it despite short-term glitches.

Invesco India Financial Services is also a consistent performer that has delivered strong returns over the past year. The fund’s investments in Bajaj Finance, ICICI Lombard, MCX, Kotak Mahindra Bank, etc, have delivered spectacular returns, aiding performance. Adding stocks such as Reliance Nippon Asset Management, SBI Life and Bandhan Bank to its portfolio has also paid off.

SBI Banking and Tata Banking are other funds that have delivered high returns over the recent years. Over the past year, they have delivered category-beating returns.

SBI Banking Fund’s exposure to Bajaj Finance, Kotak Bank, AU Small Finance Bank, HDFC Life, ICICI Pru Life, ICICI Lombard and Muthoot Finance appears to have paid off handsomely.

For Tata Banking too, investments in most of these stocks, alongside Bajaj Finserv and MCX, have worked well over the past year.

However, these funds have a less-than-five- year track record. Nonetheless, investors can continue to monitor and consider them, if they continue to deliver strong returns.

Published on November 30, 2019
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