Excellent choice-BANKING FUNDS
Source: Economic Times Mumbai, 7th August 2007,Your Money, Page2 (www.timesyourmoney.com)
WITH the Sensex returning a whopping 43% in the past year, investors with equity exposure have made handsome gains in the broad-based rally in the stock market. However, the fund category that stood above the rest has been banking sector funds,which delivered returns of over 75%. These funds outperformed even the category benchmark, the BSE Bankex, which jumped 71% in the same period.
The past few years have been a golden period for domestic banks, as strong economic growth has led to a huge surge in credit offtake. Banks have seen an almost vertical rise on nearly every front, from direct lending to treasury operations to retail loans.
Despite the tough business environment created by the cycle ofrising interest rates since 2003, they have done remarkably well. Even amidst intense competition, the net interest margins (NIM, an important indicator of a bank’s profitability) of most banks has remained stable between 2.5% and 3.5%. This also indicates the ability of banks to pass off higher deposit costs on borrowers.
The operating efficiency of public sector banks has improved significantly in recent years. The ROE (return on equity) gap between the public and private banks has narrowed considerably. However, the new and private sector banks are faring better than old and public sector banks in attracting higher valuation in the market. Banking funds fall under the category of sectoral funds.
Sectoral funds, as the name suggests, focus on a particular sector, like banks, pharmaceuticals, technology, and fast-moving consumer goods (FMCGs). Unlike a diversified equity fund, which has limited exposure to any sector, sectoral funds invest predominantly in one sector. Due to their strong focus, sector funds are inherently more and hence carry higher risk-reward for investors.
Even with such a robust performance by banks, it is surprising that there are only three banking-focused funds in the country. The Bank BeES run by the Benchmark Mutual Fund is an exchange-traded fund. The other two—Reliance Banking Fund (RBF) and the UTI Thematic Banking Sector Fund (UTIBF)—are both open-ended equity mutual funds. Incidentally, the Benchmark Bank BeES is the largest fund in the country, with assets under management (AUM) of Rs. 6,531 crores on 30th June 2007. But compared to the other two open-ended counterparts, the performance of Bank BeEs has been fairly mediocre of late. The performance of RBF has been exemplary, as one can observe from the table.
If you invested Rs.10 in RBF in May 2003, it would have almost multiplied five times in only four short years. By contrast, Rs. 10 invested in the UTIBF is worth only two and half times as much in the past three years. If you compare the portfolios of RBF and UTIBF, you will find huge variance in the investing style and scrips invested. True, State Bank of
RBF has a greater focus on mid-cap or smaller emerging banks, while UTIBF has a higher level of large-cap or big public-sector banks. Remarkably, both portfolios have a liberal sprinkling of non-banking stocks, as the offer documents of both allow for the same.
If you want to build a long-term growth portfolio, you should definitely consider adding banking funds to your investment stable, since banks are a good proxy for the economic growth in the country. As the Indian economy expands further, banks will be a direct beneficiary of the GDP explosion is likely in the future.
With Basel II banking norms being implemented from March 2008, and with RBI’s roadmap to allow banking mergers and acquisitions from 2009, the valuations of most banks will be certainly driven upwards. It’s an old cliche, but it just may turn out that, in the future, investors in banking funds will be laughing all the way to the bank. Sameer Kamdar is country head, mutual funds, Mata Securities
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