AMFI Registered Mutual Fund Distributor | SEBI registered Investment Adviser
                Fundsupermart.com | Global   
SEARCH 
  Need Investment Help?
Talk To Us.
  *   
  *   
  *   
 
Research
   SUBSCRIBE TO E-NEWSLETTER
Subscribe
Share |
  Email
Print
more
Fund Analysis - Reliance Banking Fund June 2, 2011
The banking system is often referred as the heart of the economy with money being the blood. This statement is completely true as any economy must have a sound banking system for it to function properly. We discuss the opportunities within the sector for retail investors.
Author : Manjunath Gaddi


 Fund Analysis – Reliance Banking Fund

The Indian Banking sector is one of the soundest banking systems in the world. This has been proved right during the Asian banking crisis or the global crisis of 2008 which impacted the profitability and the survival of banking sector in India to a small extent unlike its international counterparts.  The Indian banking sector is also one of the key sectors that are driving the economy.

Higher NIM for Banking Industry

Net Interest Margin (NIM) in simple terms can be defined as the ratio of net interest income to average earning assets. Here, the net interest income is the difference between the interest paid out by the bank on its deposits and the interest received on its loans. The average earning assets of a bank include loans, investments, etc.

Profitability of this sector as measured by NIM is high; this fact has been even highlighted by the Governor of RBI in the speech of BANCON 2010 held in January 2011. Also, in the same speech the Governor has stated that the NIM of Indian Banks is higher as compared to NIMs of the banks in other emerging markets.

So, the banking sector is one of the most sought after investment sectors in India. This is seen in the investments that the mutual funds have in the banking space which have never fallen below 12.7% of the total equity investments by fund houses. Chart 1 highlights the level of mutual funds investment in the banking sector.

The banking sector has high growth prospects in the short and the long term on account of:

  • The banking sector is expected to finance some part of the US$ 1 trillion infrastructure investment in the 12th five year plan between 2012 and 2017. Thus, this sector would be one of the key beneficiaries of this mega investment plan.

  • Rural thrust for financial inclusion: The MNREGA program of the government offers a 100 day job for rural households. In his budget speech of FY2011-12, the finance minister has announced a real wage of INR 100 per day. The improving economic situation in the rural India is bound to increase the need for financial services in it.

  • The RBI expects the credit growth for FY2011-12 to be at 19%. This is much lower as compared to 21% growth in FY2010-11.

However, there are a few concerns:

  • The RBI governor has expressed concerns over the high NIM of the Indian Banks. He stated in the in his speech at BANCON 2010,  that the banks need to increase interest rates offered to depositors and reduce their lending rates. However, this statement is not binding on the banking system as the lending and deposit rates are decided by them. Considering the relationship between the RBI and the banks, we may see a gradual decrease in the NIM of the Indian Banks over the next few years affecting their profitability.

  • The RBI is currently seeking public opinion on savings account rate deregulation. Currently, of the three rates, savings rate is the only one being regulated by RBI. The deposit and the lending rates are fixed by the banks. Any savings rate deregulation will decrease the profitability of the banks as the banks are currently paying only 4% interest on saving account and deregulation will force them to offer higher rates. The banks are against it with the RBI favouring deregulation.

Mutual Funds Prefer Banks

Despite the concerns, the banking sector is still a favorite among fund managers with high growth prospects. This is also evident from the growth trajectory of the MF investments in this sector as seen in Chart 1.

Almost all the equity funds except FMCG, IT and pharma sectoral funds have exposure to the banking industry. However, the exposure to the banking stocks is limited for diversified funds as they have a mandate to invest across sectors and companies. Also, SEBI rules prohibit mutual funds from investing more than 5% of its NAV in a single company for an open-ended fund and not more than 10% into a single company in case of a closed ended fund. However, this rule does not apply for index and sectoral funds.

Therefore, open-ended banking sector funds can invest more than 5% of their assets in a single bank.  With investors chasing the India growth story, investment in banking funds could prove advantageous. Within this category, our recommended banking sector fund is Reliance Banking Fund.

Investment strategy

Reliance Banking Fund invests only in large and midcap financial companies.

Large-cap financial companies on an average have accounted for 70.5% of the portfolio between February 2008 and March 2011. However, the allocation to large-cap financial stocks has seen a rapid increase from an average of 62% between February and December 2008 to an average of 77.9% allocation between February and December 2010. On the other hand, the exposure to midcap financial stock, on an average, is at 12.3%.

Chart 1: Mutual Funds investments in the banking sector as a percentage of its total equity investments

Unlike rapid increase in large-cap allocation, the allocation to midcap financial stocks has decreased from an average allocation of 11.6% between February 2008 and December 2008 to 10.8% between February and December 2010.

The fund is more inclined towards investment in public banks than in the private banks.

Reliance Banking Fund has had an average exposure of almost 50% of the portfolio to the public sector banks between March 2007 and March 2011, while the exposure to the private sector banks on an average stands at 26% between March 2007 and March 2011.

Apart from the private and public banks, the fund also invests into the Non Banking Financial Companies (NBFCs) with it being much lower than the private bank investments. On an average, the fund has invested around 5.6% into NBFCs between March 2007 and March 2011.

The fund has had a cash exposure of 7.2% over the past one year i.e., between March 2010 and March 2011. But over the four year period (between March 2007 and March 2011), the average cash exposure has been high at 12.7%. This is on account of the fund having a higher cash exposure of 14% or more between June 2007 and February 2009 and it reached the high of 32% in February 2008.

Performance

As seen from Chart 2, the Reliance Banking Fund has not only outperformed its benchmark, the CNX Bank Index but has also, outperformed other banking sector funds. If an investor had put Rs. 10,000 into the fund on 31 March 2009, his investments would be worth INR. 29,744 as at 29 April 2011.

Our view on the fund

The banking sector is one the sectors that is expected to be a key driver of the economy as it would finance the infrastructure projects in the coming future. The banking sector as an investment option is very well suited for an investor who has the risk appetite for a sectoral fund. Reliance banking fund is the best performing banking fund in the industry as it is evident from Chart 2.

 

We recommend the Reliance Banking Fund to our investors with a time horizon of more than three years.


Don’t have an account with Fundsupermart.com?
Open an account for free

Do not hesitate to Contact Us for any information or assistance required!


Disclaimer: iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's scheme information document including statement of additional information. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer on the website.Please read our disclaimer in the website. Risk Factors: Mutual funds, like securities investments, are subject to market risks and there is no guarantee against loss in the Scheme or that the Scheme’s objectives will be achieved. As with any investment in securities, the NAV of the Units issued under the Scheme can go up or down depending on various factors and forces affecting capital markets. Past performance of the Sponsor/the AMC/the Mutual Fund does not indicate the future performance of the Scheme. The name of the Scheme does not in any manner indicate the quality of the Scheme, its future prospects or returns. Please read the Statement of Additional Information and Scheme Information Document carefully before investing.



Comments (0) | Comment on this Article
 (Click on Comments/Comment on this Article to show or hide comments/post a comment)
USEFUL LINKS
Recommended Funds
Recommended Portfolios
Chart Centre
Risk Profiler

<%@ page import="com.fin.common.web.util.*"%> <%@ page pageEncoding="UTF-8" %> <%@page import="com.fin.common.manager.fund.FundManager"%> <%@page import="com.fin.common.dao.fund.FundInfoBean"%> <%@ include file= "pageTitle.jsp" %> <% I18NSession i18n = I18NSession.getI18NSession(session); boolean onLoadScript=false; // defining the default pages for the template if (main==null || main.equals("")) main="main.jsp"; if (header==null || header.equals("")) header="header.jsp"; if (footer==null || footer.equals("")) footer="footer.jsp"; if (leftBar==null || leftBar.equals("")) leftBar="leftBar.jsp"; if (leftBar2==null || leftBar2.equals("")) leftBar2=""; if (body_onload==null || body_onload.equals("")) body_onload=""; else { if (E2EEUtil.isE2EEStatusActiveFSM()) { onLoadScript = true; if (body_onload.lastIndexOf("/")!=-1) body_onload = body_onload.substring(body_onload.lastIndexOf("/")+1,body_onload.length()); body_onload = "javascript:"+body_onload+"()"; } } //System.out.println("Leftbar *******"+leftBar); Boolean isSecure = (Boolean)request.getAttribute("common.template.isSecure"); if ( isSecure == null ) isSecure = new Boolean(false); // Default secure = off %> <% String requestedURL = request.getAttribute("javax.servlet.forward.request_uri").toString(); %> <% if (request.getAttribute("article")!=null) { com.fin.common.dao.content.Article1Bean article = (com.fin.common.dao.content.Article1Bean)(request.getAttribute("article")); String Articleurl="http://www.fundsupermart.co.in/main/research/viewHTML.tpl?articleNo=" + article.getArticleno(); %> Fundsupermart.com -<%=article.getTitle()%> <% }else if(request.getParameter("sedolnumber")!=null && !"".equalsIgnoreCase(request.getParameter("sedolnumber").toString().trim()) ){%> <% FundManager fm = new FundManager(); FundInfoBean fundinfoBean1=fm.loadFundInfo(request.getParameter("sedolnumber").toString().trim()); %> fundsupermart.com -<%=fundinfoBean1.getFundName() %> <% }else if(strPageTitle!=null && !"".equals(strPageTitle)){ %> <%=strPageTitle %> <% }else{ %> fundsupermart.com -<%=ProjectProperty.get("common.tagline")%>|<%=ProjectProperty.get("common.taglineExt")%> <% } %> <% if(requestedURL!=null && ProjectProperty.get("fsm.metatag.main.school.gettingStarted")!=null && ProjectProperty.get("fsm.metatag.main.school.gettingStarted").toString().indexOf(requestedURL)!=-1){ %> <% if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("1")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("2")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("3")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("4")){ %> <% } %> <% }else if(requestedURL!=null && ProjectProperty.get("fsm.metatag.main.school.basics")!=null && ProjectProperty.get("fsm.metatag.main.school.basics").toString().indexOf(requestedURL)!=-1){ %> <% if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("1")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("2")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("3")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("4")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("5")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("6")){ %> <% } %> <% }else if(requestedURL!=null && ProjectProperty.get("fsm.metatag.main.school.investing")!=null && ProjectProperty.get("fsm.metatag.main.school.investing").toString().indexOf(requestedURL)!=-1){ %> <% if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("1")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("2")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("3")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("4")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("5")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("6")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("7")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("8")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("9")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("10")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("11")){ %> <% } %> <% }else if(requestedURL!=null && ProjectProperty.get("fsm.metatag.main.school.financialPlanning")!=null && ProjectProperty.get("fsm.metatag.main.school.financialPlanning").toString().indexOf(requestedURL)!=-1){ %> <% if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("2")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("3")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("4")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("5")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("7")){ %> <% }else if(request.getParameter("PageID")==null || (request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("")) ){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("10")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("12")){ %> <% } %> <% }else if(requestedURL!=null && ProjectProperty.get("fsm.metatag.main.research.listArticles")!=null && ProjectProperty.get("fsm.metatag.main.research.listArticles").toString().indexOf(requestedURL)!=-1){%> <% if(request.getParameter("categoryid")!=null && !request.getParameter("categoryid").toString().equalsIgnoreCase("") && request.getParameter("categoryid").toString().equalsIgnoreCase("17")){ %> <% }else if(request.getParameter("categoryid")!=null && !request.getParameter("categoryid").toString().equalsIgnoreCase("") && request.getParameter("categoryid").toString().equalsIgnoreCase("26")){ %> <% } %> <% }else if(requestedURL!=null && ProjectProperty.get("fsm.metatag.main.research.viewHTML")!=null && ProjectProperty.get("fsm.metatag.main.research.viewHTML").toString().indexOf(requestedURL)!=-1){%> <% if(request.getParameter("articleNo")!=null && !request.getParameter("articleNo").toString().equalsIgnoreCase("") && request.getParameter("articleNo").toString().equalsIgnoreCase("149")){ %>