Mutual funds exposure to banking stocks at 19-month low

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SummaryEquity exposure of mutual funds to the banking sector slid to its lowest level in last 19 months.

The equity exposure of mutual funds to the banking sector slid to its lowest level in the last 19 months in July as fund houses rushed to trim their holdings in banking scrips, which slumped amid RBI’s measures to tighten liquidity.

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Mutual fund investments in banking stocks as a percentage of equity AUM slid 2.7% in July over the previous month to touch 16.93%, a 19-month low, Sebi data show. mutual funds also reduced their exposure to financials by 0.51%. mutual funds' deployment in banking stocks stood at Rs 28,862 crore as of July, a decline of 18.5% from Rs 35,442 crore in June.

Mutual funds rushed to reduce their exposure in banking stocks, which were hammered on the bourses in July. Banking stocks fell primarily on account of the RBI’s liquidity tightening measures, which pushed up yields sharply. The yield on benchmark 10-year bonds rose about 70 bps to 8.169% at the end of July from 7.463% at the end of June.

“The change in the interest rate environment prompted funds to reduce exposure to interest rate sensitive sectors, such as banking, which was among the worst hit in July,” said Dhruva Chatterji, senior investment consultant, Morningstar India. “The steep fall in the prices of banking stocks also eroded the MF holdings in banking scrips.” The BSE Sensex index was down 13.7% in July and is down 29% YTD.

Mutual funds were bullish on IT and defensives in July. Their exposure to software companies rose the most during the month to 12.91%, up 2.7% over the previous month. Funds also raised holding in pharma and FMCG stocks by 0.4% and 0.2%, respectively. Holding in telecom stocks was raised by 0.75%.

“IT stocks outperformed in July, led by corporate earnings for the three months to June, which came in line or ahead of estimates,” said Chatterji. “The rupee's depreciation also boosted the performance of IT stocks as well as other export-oriented sectors such as pharma and healthcare,” he added.

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In July, BSE IT and BSE Teck indices gained 19% and 16.8%, while the BSE Healthcare and BSE FMCG gained 2.6% and 5.2%, respectively. The rupee depreciated 1.6% in July. In the year to date, BSE IT and BSE Teck indices are up 39% and 28%, respectively.

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