Is your mutual fund overexposed to banking stocks? (2024)

Impact

Developments in banking sector
Banks have been facing problems on the asset quality front. In simple words, banks are facing problems in recovering loans and interest due from the borrowers. Tough economic conditions and higher interest rates are often blamed for the slippage in the quality of assets of Indian banks. Lapses in risk management processes are also blamed for the poor asset quality.

Until a few quarters ago, it was believed that, as the economy would recover, problem of Non-Performing Assets (NPAs) may become less serious. But latest quarterly results suggest that the worst may not be over just yet. Banks are finding it difficult even to recover restructured loans and many of the restructured loans have started turning bad. In order to give a fair chance to borrowers, banks sometimes allow restructuring of loans. However, what is terrifying is despite of renegotiated terms, restructuring of loans is not working for banks. As far as recovery of economy is concerned, picture remains obscure. Priority and infra sectors are the biggest sources of stressed assets. Developments such as cancellation of licences of captive coal mines and non-availability of gas and coal for power plants pose an even bigger threat to already stressed banking sector as borrowers are feeling the heat.

Are mutual funds over bullish on banking sector?
Mutual funds are managed by professionals having expertise in managing money. If you invest in a fund that follows sound processes and systems, you may not have to bother much in case your fund has higher exposure to banking sector. It is important to understand that not all banks are equally affected. Public sector banks are affected more than their private sector counterparts. Furthermore, some banks have a good track record in containing NPAs with stringent risk management strategies. As against this, if you have observed that your fund frequently churns its portfolio and takes sector calls in a speculative manner, you rethink about holding it in your portfolio.

PersonalFN is of the view that, mutual funds that go by the merit of a company rather than just looking at the opportunities present in a sector as a whole, have a better chance of generating higher risk adjusted returns in the long run. PersonalFN suggests you to take a closer look at the performance of your mutual funds. Staying invested in funds having proven track record of consistent performance may pay off in the long run.

You may take advantage of mutual fund research services provided by PersonalFN. Unbiased nature of reports and thorough analysis of funds help you choose potential winners for your portfolio.

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Impact

Like in cricket, dynamics may change fast in an economy as well. You might be proud of some achievement but sooner rather than later you would realise that you exaggerated achievements. RBI has been raising alters against being overconfident about forex reserves.

At USD 330 billion India currently holds highest ever forex reserves and appears well placed for tackling global uncertainties. However, RBI cautioned that, in case of extreme volatility in currency markets, such a high level of foreign exchange may not be adequate enough. Having said this, RBI deputy Governor Mr H.R. Khan expressed confidence saying, “if another round of Quantitative Easing unwinding happens, we would be the last possibly to be affected”. He, however, continued cautioning against any laxity and complacency. RBI has time and again expressed its concerns over unhedged positions of Indian companies opting for foreign currency loans. This can result in catastrophic loss to companies and even pose a threat to the entire system if corporates don’t give a timely attention to this issue.

PersonalFN believes RBI has been taking proactive steps in protecting Indian Rupee from possible dangers by recognising them at early stages. Falling crude oil prices have aided India in saving valuable foreign exchange reserves. PersonalFN is of the view that, data points such as Current Account Deficits (CAD), Balance of Payments (BoP) would affect value of rupee to a great extent. It also remains to be seen how INR performs in case Federal Reserve (Fed) in the U.S. goes for interest rate hikes in deed. Rupee movement would not only affect position of foreign exchange reserves but would also affect inflow of foreign capital in Indian capital markets.

PersonalFN is of the view that, although it is important to track macro-economic indicators, it is a bad idea to base your investment decision on them. Identifying your financial goals and following personalised asset allocation would help you in the long run.

Impact

• As per the latest numbers, Indian economy is the fastest growing economy among large economies of the world
• Also, Indian economy has become a 2 trillion USD economy

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Impact

Unlike last few budgets which were presented amidst tough economic conditions, the upcoming first full-budget of the NDA Government would be presented on a much confortable backdrop. High inflation along with high fiscal and current account deficits had overshadowed last few budgets. However, for now twin deficits do not seem to be as worrying as they appeared in the past. Inflation has also come down considerably giving some relief to market participants. Globally, crude oil prices have come down nearly 50% over last 1 year providing windfall gains to countries like India that depend heavily on imports. This further gives comfort to the Government while drafting economic policies. Having said this, many fear that the twist of election results in Delhi may change the tone of the Budget. It is also believed that, defeat of BJP in Delhi may force the Government to take some populist measures keeping in mind Bihar assembly elections to be held later this year.

PersonalFN is of the view that, the upcoming budget will be the litmus test for the Modi-led-NDA Government. So far, the markets have been resilient despite of expensive valuations and ordinary performance of corporate Inc. However, markets may lose substantial ground if the budget fails to meet expectations of investors.

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• Acche Din might still be a distant dream for a common man but good times are back for mutual fund industry. Not very long ago mutual fund industry was struggling to handle relentless outflows; but with improvement in the market sentiment mutual funds are witnessing robust inflows in equity oriented funds.

  Sustained rally, no further deterioration in fundamentals and optimism about the reform agenda of the Government has brought individual investors back to equity oriented funds. Mutual funds collectively saw an addition of 4.6 lakh new folios in January 2015, highest in any month from 2008. Equity oriented mutual funds have a base of over 3 crore investors. Mutual Funds launched 8 New Fund Offers (NFOs) in January which piled up in excess of Rs 2,300 crore. It is noteworthy that, registrations for Systematic Investment Plans (SIPs) have gone up substantially and average size of SIP has also inched up. Having said this, about 14 gold Exchange Traded Funds (ETFs) experienced outflows worth approximately Rs 130 crore.

  PersonalFN believes, opting for SIP route is one the best methods for investing in equity markets. However, investing in NFOs should be avoided, through SIP mode as well. NFOs don’t have any track record to depend on. PersonalFN recommends that you should prefer funds with a proven track record of consistent performance. You may invest through SIP route to deal with stock market volatility. Moreover, taking momentum calls on any asset class and investing in or liquidating investments from any asset class based on its outlook is speculation. Dynamics for any asset class may change dramatically without giving you any prior hint. This may result in a great loss to your portfolio. A desirable approach is to focus on your financial goals and invest as per your personalised asset allocation carefully crafted to take care of your goals.

(Source: Investopedia)

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