According to latest data available with Sebi, Mutual Fund (MF) industry's investment in banking stocks stood at Rs 22,744 crore as on August 31, accounting for 15.7 per cent of their total equity assets under management (AUM) of Rs 1.45 lakh crore.
This was their lowest exposure in the banking shares since August 2009, when the total value of mutual fund investments in the banking sector stood at Rs 22,586 crore.
The mutual fund exposure to banking stocks had rose to as high as Rs 43,659 crore in December 2012.
Market participants attributed the decline in investment in banking shares to overall volatility in equity market.
Banking stocks are also under-performing broader market because of liquidity pressure due to various steps announced by the Reserve Bank and deteriorating asset quality of public sector banks, market analysts said.
Besides, bottom line of various public sector banks have also declined because of higher provisioning.
During August, banking index (bankex) crashed by nearly 10 per cent, while 30-scrip sensitive index (Sensex)dropped by 3.75 per cent.
However, banking stocks continue to remain the most preferred sector for mutual funds, followed by software (14.01 per cent exposure), pharma (8.59 per cent), consumer non-durables (7.44 per cent) and petroleum products (6.19 per cent).
Mutual fund is an investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets.
In 2012, there was a consistent investment growth in banking stocks by the industry's equity fund managers and their exposure has risen from 17.23 per cent of total AUM in January 2012 to 21.15 percent in December.
The increase in allocation of funds to banking stocks in 2012 was largely attributed to declining interest rates.
In August this year, banking was followed by software space where the mutual funds' investment stood at Rs 20,284 crore, while pharma sector accounted for Rs 12,444 crore, consumer non-durables Rs 10,771 crore and petroleum products Rs 8,958 crore.