Bank stocks related funds have emerged as outperformers across all categories of schemes in one-,three-,five-, and 10-year time frames, according to mutual fund research firm Value Research.
In a one-year period ended August 7, banking funds category delivered 31.6 percent average returns. In comparison, Bank Nifty Index rose 30 percent during the same period. Even in the three-year and five-year period the category has outperformed its benchmark index.
Similarly, in a 10-year time-frame banking funds category gave 16 percent average returns compared with 13.7 percent return by Bank Nifty index.
Fund officials said that given the current valuation in markets, very few sectors offer a good risk-reward bet. With Nifty over 10,000 and market price-to-earnings in the top quadrant, there are few sectors and stocks that offer value.
While Bank Nifty has touched a new high of 25,030, there are stocks in the sector, especially in the public sector space, that offers better valuation but higher risk.
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Also, as the weightage of banking stock in the index is high at near 30 percent, fund managers are compelled to buy banking stocks in order to be close to the index performance.
According to the data on the Securities and Exchange Board of India, allocation to the banking sector reached an all time-high of Rs 1.47 lakh crore at the end of June.
The banking sector has traditionally been considered a proxy for the economy. Banking sector credit growth has historically been between 2-2.5 times GDP growth.
However, with the toxic asset problems and other sources of non-banking finance available in the market, the ratio has fallen to nearly 1.6 times the GDP. This ratio is expected to improve as banks start lending again in line with the growth in the economy.
In terms of individual schemes, ICICI Prudential Banking and Financial Services Fund offered the highest average return of 41 percent in one-year while Tata Banking and Financial Services Fund was the second best performer delivering 40 percent average returns. Reliance Banking Fund stood third with 39.5 percent average returns.
Among categories, infrastructure-sector linked funds were the second best performers in one-year and three-year time frames. While the defensive pharma funds category was worst hit across all tenure.
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