Laugh all the way to the bank, with the bankers

There’s much upside ahead for investments in banking sector funds

MUMBAI: ‘Laughing all the way to the bank’ has a new meaning these days. With so many people laughing their way to banks, it is the bankers who have the most to laugh about.

Not for nothing is the financial services sector being touted as the next big driver of growth. Experts say we are on the brink of the third leg of the services revolution. While the first leg was driven by software services and the second was driven by telecom services, financial services will take care of the third leg, they say. Among others, banks, brokerages, insurance companies and mutual funds will drive this growth.

Investors who want to be a part of this promising story can well buy into mutual fund schemes dedicated to this sector. However, one must remember that sector funds are risky propositions in so much that these funds take a concentrated bet within a particular sector. One should invest in these funds if one is particularly bullish about it.

The choice is limited in this space as it is a relatively new genre with the first fund started only in 2002.

Four schemes are available in this space: three concentrate on the banking space, while one invests in the larger financial services sector.

The biggest among these funds is the Benchmark Bank BeES fund. It has a corpus of Rs 7,005 crore as on October 31, 2007. The fund has beaten its benchmark of Bank Nifty comfortably in both 3-year and 1-year returns.

The scheme has given returns of 67% in the last one year, against the 65.7% clocked by the Bank Nifty index. On the 3-year criterion, too, the fund has a compounded annual growth rate of 52.3%, higher than the benchmark’s 51.1%.

Experts say a large chunk of this rise is due to the money pumped in by foreign institutional investors. FIIs are using this route to buy into banking stocks in which they cannot invest directly due to the 20% ceiling on FII investments.

Exchange traded funds (ETFs) are listed and traded on the stock exchanges. ETFs are baskets of securities that are traded, like individual stocks, on an exchange. Unlike regular open-ended mutual funds, ETFs can be bought and sold throughout the trading day like any stock.

ETFs are different from mutual funds in the sense that ETF units are not sold to the public for cash. Instead, the asset management company that sponsors the ETF, takes the shares of companies comprising the index from various categories of investors such as authorised participants, large investors and institutions.

Reliance Banking Fund was launched in May 2003. It is much smaller than the Benchmark fund with assets totalling Rs 340 crore. However, in returns, the scheme has delivered close to the bigger fund. In the last one year, it has delivered returns of 65.6%. Both the banking sector indices, Bank Nifty and BSE Bankex, have given better returns than this fund. Even in the 3-year criterion, the fund trails the indices by a mile.

While the fund has given returns of 48.7% in 3 years, Bankex has given 54% and Bank Nifty has given 51%. This means the fund manager has not enhanced your returns. On the other hand, he has deprived a couple of percentage points of returns you would have got by putting your money on the banking index. On top of it, he will charge you fees.

As of October 31, the fund was sitting on cash of close to 17%. This seems to have cost it dear as it has missed out the recent liquidity-driven mega rally in the stocks.

Its portfolio is relatively well-diversified with SBI being the top holding with an allocation of 15%.

The UTI banking Sector has done well in the one-year time period with 70% returns, beating both the banking sector indices. Over a quarter of its assets are concentrated on a single stock, ICICI bank.

SBI, the other heavyweight, enjoys 19% allocation in the portfolio. IDFC, Shriram Transport Finance and Power Finance Corporation are the three non-banking stocks in the portfolio, together accounting for 8.6% of the total corpus.

The size is relatively smaller at over Rs 104 crore.

The latest entrant in this space is JM Financial Services sector fund. The fund launched in November 2006 has been the best performer with over 71% returns for the year.

Though it has huge chunks in ICICI bank (15%) and SBI (7.9%), it has the most diversified portfolio among the reviewed funds with 17 stocks in its portfolio. Its corpus is still very small at Rs 20 crore.

But, the category as a whole has given average returns of 67%, which is better than most other sectors, and equity diversified funds. Only the infrastructure sector funds have given better returns than these banking funds. Watch this space for more on those funds.