Mirae Asset India mutual fund has rolled out a new sector-specific scheme. The timing of the launch of Mirae Asset Banking & Financial Services Fund (MBANK) seems odd. While the S&P BSE Sensex has delivered 7 percent so far this year, the BSE Bankex has lost close to 8 percent. Banking sector funds have underperformed all other category of schemes since January 1, 2020. Investors turned cautious on lenders, as there was a fear of large scale defaults on loans due the pandemic. After Reserve Bank of India stepped in, and with various policy measures taken by the government, some experts – as well mutual funds such as Mirae – started considering the sector as a value buying opportunity.
What’s on offer
MBANK is a thematic fund that will invest in shares of banks and financial services companies. It will invest a minimum of 80 percent of the assets in stocks. The remaining 20 percent can be invested in other stocks as well as bonds. Harshad Borawake and Gaurav Kochar will be the fund managers of the scheme. The fund’s benchmark will be the Nifty Financial Services TRI.
The scheme is an actively managed sector fund that will offer a compact portfolio of 15-30 stocks from the banking and financial services pack in India. These will include stocks of private sector banks, insurance companies and other financial services companies. Although it can invest in state-owned banks, the fund house has indicated that it would do so only selectively. The fund would also be discerning while buying shares of non-banking financial services firms. The portfolio will be built by taking a bottom-up approach – the stocks will be screened using quantitative and qualitative factors.
The banking and financial services sector has a high correlation with the growth in the Indian economy. It is a structurally important sector. As financial inclusion catches up through digital means, this sector may see high growth in the future. This fund can be a vehicle to play that growth story. Banking and financial services have a large share even in mainstream indices. The Nifty 50 and Nifty 200 had 35.52 percent and 32.18 percent allocation to the financial services segment, respectively, as on October 30, 2020.
In March 2020, stock prices of many lenders turned volatile as there were fears of large-scale defaults. However, market participants are expecting better times ahead as macroeconomic indicators improve. In the last three months, there has been a quick recovery in the stock prices of financials. “The non-performing assets ratio has improved compared to the previous year. Valuations of banks have turned attractive compared to pre-COVID levels. The earnings growth and return on equity should normalize in FY22-23,” says Harshad Borawake, Head of Research & Fund Manager, Mirae Asset Investments Managers (India). “Supportive government policies and regulations, along with low penetration of financial services, give a good entry point for investors looking to participate in future growth,” he adds. Small wonder then that the BSE Bankex rose 26.34 percent in the last three months alone.
What does not work
Though the NPA cycle appears to have bottomed out, a second wave of the COVID-19 pandemic and the resultant impact on economic activity can further worsen the loan book quality of banks. Investors need to be prepared for interim volatility till the situation normalises.
When you invest in a sector fund, you take concentration risk. If the fortunes of the sector worsen, then the fund manager can do little, as the investment mandate of the scheme prohibits him from turning away from the sector. “To make money in a sector fund, you have to understand the sector dynamics well and time both the entry and the exit well,” says Amol Joshi, founder of Plan Rupee Investment Managers. If you cannot do that, you are better off with a diversified equity fund.
What should you do?
Sector and thematic funds’ fortunes are tied with one or very few segments. If these sectors go through any turmoil, your scheme’s net asset value falls sharply. Hence, such funds should never form a part of your core portfolio. They can at best be a part of your satellite portfolio, only if you understand the sector or the theme well enough to time your entry and exit. These funds are not your typical ‘buy and hold’ investments.
The good news is that your diversified funds would typically hold a large share in bank shares due to their benchmark indices’ large allocation. Most diversified equity schemes have 20-30 percent allocation to financial services, unless the investment mandate prohibits them. For example, multi-cap funds as a category had 26.61 percent allocation to financial services as on October 31, 2020, according to Value Research.
The new fund offer will close on December 4, 2020.