As economic activity goes up, the demand for various necessities as well as luxuries go up. Consumers won?t mind applying leverage to acquire what they want. A natural outcome of which is the demand for credit. With the demand for goods and services going up, investments in the industrial sector also rise and so do the demand for loans and advances.
Banking is a sector that clearly enjoys the fruits of rising economic activities in any country. Indian banking is no exception to this. Post 2000, the banking industry has done extremely well. Though, in the last one year or so, due to slow down in the credit demand on the back of northward movement in the interest rates, banks are facing tough times managing growth.
On the other hand, the banking index has posted one of the strongest performances on the bourses for the last couple of years. This has resulted in the Indian banking space turning costly, compared to their global peers China.
However, those who believe in long-term structural changes in the Indian economy and the resultant growth that the economy will experience, should show conviction in holding Indian banking counters in their portfolio. If you are not comfortable picking individual stocks, you may also consider seeking expert assistance doing so. The fund offerings that invest in banking space from Reliance and UTI have delivered well and beaten the Bankex by a decent margin. The Reliance Banking Fund offers maximum diversification. The top 5 holdings amount to 48% of the entire portfolio, whereas the UTI Banking Sector Fund has 65% of the portfolio in top 5 holdings.
Both the funds have opted for a judicious mix of private and public sector banks, along with non-banking finance companies catering to credit needs of specific business verticals. In the NBFC space, they are counters like HDFC, IDFC, STFL, and PFC.
The other method of taking an expert assisted exposure to the banking sector is to invest in an exchange-traded fund. You have two such options offered by Benchmark AMC. Benchmark Bank BeES is a banking sector fund that enjoys the highest assets under management amounting to Rs 7,005 crore in the banking fund space. The fund has delivered 52% returns over the last one year. However, the top 5 holdings amount to 83% of the portfolio, leading to a heavy concentration risk. On the other end, the other offering PSU Bank BeES is a relatively new offering and hence is not considered. However, it is suitable for those who intend to buy only the PSU stable and willing to wait for value unlocking to happen.
The immediate trigger for the sector is a downward movement of interest rates. There are enough signs that we are near the peak of interest rates. Over a period of six months, there is an expectation of a 50 basis point cut in the bank rate. The banks have already reduced their deposit rates and in some cases, lending rates. This, for sure will boost the demand for credit.
Post 2009, as the banking sector opens up, there will be value buying in the Indian banking sector by foreign players and domestic large sized banks. The consolidation is expected to pay off the shareholders in the long run. One can take exposure to this sector by a systematic investment plan to reap benefits in the long run.
The key concerns are interest rates hardening and slow down on the reforms front, due to ?political discomfort ahead of elections?.
Also, one should note that investing in a sector fund attracts higher risks than investing in a diversified equity fund, as the future of the fund is tied to the fortunes of the sector. These factors must be considered while investing in the banking sector fund.