The exposure of equity mutual fund (MF) schemes to financial sector stocks has come down considerably in the last few years with the investors eyeing other sectors and themes as the banking shares continue to underperform. As of October, equity MFs had an exposure of around 25% to financial sector, down 8 percentage points from 33% in January 2020, data from Value Research showed.
Investors have been dabbling in sectors and themes like infrastructure, healthcare, automobile and auto ancillary, and technology. The strong returns in these segments have further bolstered investors’ confidence.
The allocation to the capital goods sector has risen to 6.6% from 4.3% in last five years, while exposure to automobile has also increased to 7.8% from 5.3%.
“We believe the relatively lower percentage holdings of MFs in the financial services sector primarily reflect the broad-based earnings growth across various sectors beyond financials such as manufacturing, defence and power witnessed over the years,” said Trideep Bhattacharya, president and CIO – equities at Edelweiss MF. “This trend is a positive indicator as it highlights the expanding economic momentum across the broader economy.”
In H1FY25, asset management companies (AMCs) launched 30 new equity schemes. Of this, 22 were sectoral and thematic funds, with most of them focused on manufacturing, innovation and business cycle.
DP Singh, deputy MD, SBI MF, highlighted that the fall in the financial sector exposure is also due to smallcap and midcaps gaining traction.
In Nifty 100, which represents the largecap universe, the financial sector has a 32.6% weight. On the other hand, the exposure of Nifty Midcap 150 and Nifty Smallcap 250 indices to the financial services sector is 20.3% and 20.6%, respectively.
Bhattacharya expects the diversification trend to continue. “This structural shift underscores the evolving economic landscape and presents a compelling narrative for sustained broad-based growth and is expected to continue,” he said.
However, some fund managers expect financial services stocks to continue to get the outsized exposure as compared to other sectors despite the trend seen in the last five years.
Even after the decline, financial services is the only sector in which mutual funds have double-digit exposure. The next closest sector is energy, which has around 9% exposure.
In the passive funds category, while the Nifty 50 index has higher weightage to financial services sector, there has been an increase in new strategy indices like Nifty 50 Equal Weight, Nifty 50 Value 20, Nifty Growth Sectors 15, Nifty High Beta 50, etc.
Despite the increase in number of new funds focused on smart-beta and factor-based strategies, Anil Ghelani, head of passive investments and products at DSP Mutual Fund believes that plain vanilla indices will continue to hold lion’s share of AUM in India just like in global markets.