<div><em><strong>Sunil Dhawan </strong>says sector funds including banking funds suits those with high risk appetite and needs regular tracking of sector developments</em>. </div><div> </div><div>The banking sector sectors especially the PSU pack were on a roll on Monday (17 August). Understandably so, as the private banks were being preferred by the market for long. Some recent measures taken by the government including that of capitalisation of PSU banks and the announcement of the seven-pronged PSU banks' revival plan ‘Indradhanush’. The markets reacted positively to these long-awaited measures for the growth of PSU banks. </div><div> </div><div>Capital infusion by itself may not help as has been seen in the past. Revamping management and governance in PSU banks also needed to happen. Both these steps concurrently may put some things in right place but the biggest concern of banking sector that of high and rising levels of non-performing assets (NPA) still remained unanswered by these measures. The government could deal with the NPA’s issue separately. </div><div> </div><div>Whether the reforms package would change banking sector fortunes is not known but the markets reacted positively. CNX PSU BANK index was up by nearly 6.19 per cent with all 12 stocks ending up. Bank of Baroda and Canara bank rose in double digits clocking 14.99 and 12.87 percent respectively. </div><div> </div><div>For individual investors, it’s always recommended to participate in the equity markets through mutual funds. Tracking a sector and within it understanding as to how each company works is not something an individual will have the time and acumen to lay hands on the winner. Every stock, every bank has its own story and functionality.</div><div> </div><div>Therefore, sticking to diversified mutual funds helps to meet long term goals. However, a portion of one’s portfolio can be put into sector specific funds. A word of caution: The contours of a sector may change in a matter of days especially due to external factors such as economic policies, governmental change in rules and guidelines etc. impacting the fortunes of the entire sector and not just few companies within it. Hence, the risk-return equitation is the high in sector funds. </div><div> </div><div>For all those looking to embrace such high risk, a look at Banking Sector mutual funds.</div><div> </div><div><img alt="" src="http://bw-image.s3.amazonaws.com/banking-graphic-lrg.jpg" style="width: 630px; height: 309px; margin: 1px;"></div><div> </div><div> </div><div>There are two such banking sector funds available as ETFs. Kotak PSU Bank ETF with an expense ratio of 0.49 per cent and GS PSU Bank BeES with 0.51 per cent were up nearly 4.5 per cent today. </div><div> </div><div>Banking sector in India being the lifeline to economic activities, accounts for more than 80 per cent of funds flowing through the financial sector interlinking all financials services including post offices, mutual funds, and insurance, lending activities to retail, institutions and small enterprises amongst others. </div><div> </div><div>For the economy to turn corners, banks play a vital role. The credit off take in the recent years for the banks, however paint a different picture. With banks loaded with NPAs, when their capital gets eroded, they are left with o much less money to lend. The government therefore capitalise banks which has been recently announced. Government is s providing Rs 25,000 crore each in the current and next fiscal year, while Rs 20,000 crore would be provided during 2017-18 and 2018-19 in a bid to boost capitalization of public sector banks.</div><div> </div><div><strong>The downside:</strong> What matters the most in banking sector funds is the NPA. According to Economic Survey, 2014- 2015, gross NPA increased from 4.1 per cent (March 2014) to 4.5 per cent (September 2014). Keep an eye of the level and act accordingly. The credit off take is on the slide. Unless it picks up, banks profitability will remain low. Other industries performance as per recent corporate earnings, hasn’t been exciting too. </div><div> </div><div><strong>What to do:</strong> If one is optimistic about economy by expecting it to do well over the next 2-3 years, banking sector funds should be a part of the portfolio. Choose funds that a have a mix of PSU and private sector banks. Most such funds are heavily invested in ICICI, HDFC bank and AXIS bank so choose carefully for diversification. One may even consider Bank ETF’’s that come at less than half of what it costs in terms of expense ratio compared to offline MF’s. Finally, do not go overboard and invest not more than 10 percent of your portfolio in banking sector funds only though SIP in such funds.</div><div> </div>
