The banking sector fund led the pack of sectoral funds, followed by automobiles, technology and pharmaceuticals funds in providing negative return to the investors. According to ValueResearch, a research agency on mutual funds, the banking funds have given a negative return of 32.43% over a six-month period. Compared to this, the Bombay Stock Exchange's (BSE) Bankex dipped by 36%, or 4,079.84 points, at 7,255.63 points between December 14, 2007 and June 16, 2008.
Strained liquidity conditions due to the sub-prime mortgage crisis, clubbed with soaring global energy and food prices, were responsible for inflationary pressure across the globe including India. This has compelled the domestic regulator to tighten the monetary policy to contain inflation.
Mangesh Kulkarni, banking analyst at, Almondz Global Securities, said that the investors' sentiment was hit most towards the banking stocks due to the rise in the interest rates. This has led to the fear in the market that the non-performing assets (NPAs) of the banks may go up.
Another reason for the meltdown in the banking stocks was the decision of the RBI to increase the repo rate and cash reserve ratio (CRR). The financial market is expecting another rate hike to arrest inflation which is presently at 8.75%. The investors have sold their stakes in the banking stocks as they apprehend that the hardening interest rate regime may impact the profit margin of the banking sector.
A senior manager at a domestic fund house said that a sharp dip in the banking stocks was responsible for the banking funds giving negative return. The sectoral funds have by and large performed in line with the sectoral indices at the bourses. The auto funds were the second major poor performer. They have given a negative return of 31.19% as against a decline of 28%, or 1,619 points, in BSE Auto index during the same period. The rise in oil prices was responsible for the poor performance of automobile funds and the stocks. Among other funds, technology, FMCG and pharmaceutical funds have given a negative return of 15.52%, 9.23% and 2.87%, respectively.