The banking sector has been facing challenges in recent times, leading to a sluggish performance for funds focused on banking and financial services. Year-to-date, these funds have only returned 9 per cent on average, significantly lower than the 20.5 per cent return seen in flexicap schemes. Over the past year, banking sector funds have delivered a 24.8 per cent return, with performances varying widely among different funds. For example, the ICICI Pru Nifty PSU Bank ETF led the pack with a 51.9 per cent return, while the SBI Nifty Private Bank ETF lagged behind with a return of 11.8 per cent.
Investors have shown a preference for public-sector banks over private-sector banks, which has contributed to the uneven performance of banking sector funds. With 55 passively and actively managed funds in the banking and financial services space, the most recent addition being the Bandhan Nifty Bank Index Fund, investors have a range of options to choose from.
Several factors have been identified as causes of the recent underperformance in the banking sector. Regulatory actions, such as the loan-to-deposit ratio (LDR) and increased risk weight for unsecured segments, have posed challenges. Concerns about potential slippages in these segments and slowing credit growth have made investors cautious. Additionally, fundamental issues like lagging deposit growth and cyclical margin pressures have contributed to the sector’s challenges.
Despite the current challenges, experts believe that the banking sector is poised for better days ahead. The anticipated turn in the interest-rate cycle, both globally and in India, is expected to benefit banking and financial services funds. Lower interest rates are likely to stimulate economic activity and improve credit conditions, which will be positive for the sector.
The period of underperformance has also made some banking stocks attractively valued. Large private sector banks, in particular, are seen as being in a strong position within the banking space. Their valuations are attractive, and they have the resilience to manage potential challenges in retail asset quality.
However, it’s important to note that sector funds, including those focused on banking and financial services, carry a higher risk compared to diversified equity funds. Investors should be cautious about overexposure to sector funds and consider diversifying their portfolios to manage risk effectively.
For investors looking to allocate funds to the banking and financial services sector, there are different investment strategies to consider. ETFs tracking indices like the Nifty Bank or the Nifty Private Bank may be suitable for those seeking value, while actively managed schemes in the financial services sector are an option for long-term investors with a positive view of the sector. First-time investors may find flexicap schemes more suitable, as they also allocate a significant portion of their portfolio to financial services stocks.
In conclusion, the banking sector’s recent challenges have impacted the performance of funds focused on this sector. However, with the potential for interest rate cuts and attractive valuations in some banking stocks, there may be opportunities for investors in the sector. It’s essential for investors to carefully consider their investment strategy and risk tolerance when allocating funds to banking and financial services funds.
