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FundsIndia Reviews: NFO of Birla Sun Life Banking & Financial Services Fund

To market, to market, to buy a lean bank

For those of you who believe that the economy may be turning the corner, a high beta sector such as the banking and financial services sector could be the one to look for some high performance.

With a return of 23% compounded annually in the last 5 years, the CNX Finance Index has comfortably outpaced the CNX Nifty by over 5 percentage points. That said, the banking sector is also often the worst hit in economic downturns and market falls.


It is perhaps sensing opportunity in the financial services sector, in its beaten down condition now, that Birla Sun Life AMC has chosen to launch its new fund – Birla Sun life Banking And Financial Services – an open-ended theme fund that will invest in banking and finance stocks.

Case for Banking Sector

Plagued by tight liquidity, prolonged periods of elevated interest rate and lower capital investment by companies besides higher non-performing assets, banking stocks have taken a knock in the past year, thereby leading to their valuations trading at below long-term averages. The data below shows that each category – public sector banks and private sector banks, are trading well below their averages. NBFC stocks too are trading at 1.7 times their Price to Book Value, lower than the average of 2.2 times in the last 8 years.



Still, unlike many sectors such as real estate or infrastructure, which hold vulnerable balance sheets that can topple without much support, the banking sector has been governed by prudent provisioning norms by the RBI, ensuring better transparency and fewer shocks.

While there could be no near-term remedies and rates could remain elevated in the short term, it appears that corporate yields have already priced in high rates. Hence, when rates do ease over the medium term, deleveraging of corporate balance sheets could put less pressure on the banking system.

Besides, there also appear a few reform triggers in sight for the sector to leap to the next leg of growth. They are:

-          Risk weights for housing finance companies reduced, thereby freeing up more cash for lending

-          New banking licenses from 2014

-          IRDA allows insurance sector to take higher exposure to housing finance companies

-          Foreign banks to be allowed to enter India and takeover domestic lenders

-          About 1.5 lakh crore worth of infrastructure projects cleared, thus providing trigger for corporate investment cycle

That said, higher inflation and continuing high interest rate scenario could put pressure on banks’ balance sheets which are currently under stress. Requirement to adequately capitalise themselves on Basel III norms could only add to the pressure. These, therefore, remain risks to taking exposure to the sector at this point.

Large Universe

The Indian banking and finance space, including NBFCs and brokerages, has over 150 stocks to choose from with a total market cap of 1.5 lakh crore. Hence, unlike the limited options in other sector/theme funds, the finance sector offers sufficient scope for diversification. Currently, banking funds from Reliance, ICICI Pru Mutual, Religare Mutual and UT Mutual, to name a few, have all crossed a five-year record and generated over 20% returns, compounded annually in the last 10 years.

While there are banking ETFs as well, they have generated lower returns than actively managed banking and finance funds as ETFs do not take exposure to the non-banking space.

It is noteworthy that non-banking companies with exposure to housing, consumer finance and rural finance have generated exceptional returns in the past few years and continue to show strong growth. Stocks such as Bajaj Finance or Mahindra Finance are examples of re-rating stories in the market.


Investors may note that the banking and finance sector can help boost portfolio returns in an upturn, and can equally hit a portfolio during a downturn. Hence, exposure to this sector fund needs to be restricted to less than 10%. An active profit booking strategy may be needed, especially when the banking index outperforms bellwether indices by say over 10 percentage points.

Birla Sun Life Banking and Financial Services Fund itself levies an exit load for investments redeemed within 2 years; hinting that it is not meant for short-term holding.

The fund will be managed by Satyabrata Mohanty and will be benchmarked against the CNX Finance, a fairly concentrated index. The new fund offer closes on December 9, 2013.


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8 Responses to FundsIndia Reviews: NFO of Birla Sun Life Banking & Financial Services Fund

  1. Aditya Karnik December 3, 2013 at 7:25 pm #

    Dear Vidya Mam,

    Thank u for the review. However, given the fact that most of the diversified schemes in the MF domain are overweight on banking and financial services sector; is this NFO worth considering?


    • Vidya Bala December 4, 2013 at 11:17 am #

      hello Aditya, You are absolutely right that many diversified funds themselves take up to 20-25% in banking and finance and investors can ride that with reasonable risk and returns. Banking focussed funds, though outperform such diversified funds in a full fledged rally. hence, it is only for those who want focused bets for that addl. returns that come. thanks, Vidya

  2. e m sivasnkaran December 4, 2013 at 10:24 am #

    it is for those who can take risk as well as for long term investment

  3. Arun December 11, 2013 at 3:06 pm #

    Hi Vidya ,

    How about the IT focussed stock like Franklin Infotech etc..If I wish to invest INR 1 L in the FT Infotech growth and wish to have a long position for say 5 years , what is your opinion to me.

    • Vidya Bala December 13, 2013 at 11:54 am #

      Hello Arun, Sector funds should ideally not form over 10% of your portfolio because: one, if the theme goes out of favour in the market or goes through sector down cycles, unless you identify on time and exit, your portfolio will suffer. Two, large themes such as IT, banking are anyway held by diversified funds with a good weight. In fact, currently, many diversified funds are overweight on IT. Hence, while your idea of investment in IT and long-term frame of 5 years is ok, you should look at the value in light of your total equity portfolio value and then decide how much you wish to take exposure. At FundsIndia, we do not have sector funds as part of our core recommended list. if you wish to take exposure though, restrict it to about 10% of your investments. Thanks, Vidya

      • Arun December 13, 2013 at 2:46 pm #

        Thank you Vidya .

        Also need your opinion , that in the view of rebouncing of US economy , what is your opinion for retail customers to take the portfolio of US based funds like Franklin US feeder and others.

        • Vidya Bala December 17, 2013 at 3:46 pm #

          hello Arun, we do not have recommendations on international funds. But for those looking for diversification, US feeder funds can offer good opportunities, in light on the improving fundamentals in that country. But do remember, there is an element of currency risk (when rupee appreciates, these funds lose a bit) involved in such investing.

  4. Andrew Hopes February 2, 2016 at 9:55 am #

    A nice post vidya mam. Thanks a lot for sharing this.Mam can you tell me in short what actually is lean bank and its benefits in the future?

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