Fresh investments through the systematic investment route can be considered in units of Reliance Banking Fund, a theme fund that invests in banks and non-banking finance companies (NBFC). The scheme has been a top performer in the banking fund category, outperforming its benchmark (Bank Nifty) in the one-, three and five year time-frames.
The fund delivered 20 per cent and 23 per cent annualised returns over three-year and five-year periods, a good 4.8 percentage points and 7.5 percentage points higher than its benchmark.
Near-term concerns
While near-term concerns haven't entirely abated in the banking sector, valuations of stocks in the space are at a steep discount to their November 2010 highs.
Public sector banks (PSBs) represented by CNX PSU Bank index, for instance, are trading at 1.3 times their current book value as against 2.5 times multiple during the November 2010 peaks. Further, Bank Nifty index is at a 20 per cent discount to its four-year historic average valuations.
Reliance Banking slipped into losses over the last few months, in line with the sharp correction witnessed in banking stocks. Concerns over the sharp rise in interest rates impacting banks' margins as well as asset quality (these being already visible) led to banking stocks being beaten down.
While we expect these two concerns to abate only post the interest rate peak, forecasts have it that interest rates may peak in a quarter or two from now. The current valuations of banking stocks, though, appear to have factored in these concerns.
Initial signs of credit pick-up during the fortnight ended August 12 and expectation of a policy rate pause after a possible 25-basis-point hike in the next policy provide initial signs that there may be better times ahead for the sector.
Suitability
Given that the sector is likely to remain volatile for some more time, SIPs over the next year or so would help investors average costs.
Theme funds, in general, have higher risk (due to sector concentration), which once again pegs up the fund's risk profile over diversified funds. Over the last six months, Reliance Banking has under-performed broad market index S&P CNX 500.
Portfolio and Performance
Reliance Banking has a Sharpe ratio (risk adjusted return on weekly rolling basis over the last five years) of 0.09, against 0.06 delivered by the Goldman Sachs (earlier called Benchmark) Bank Exchange Traded Fund. This indicates a superior return for a given level of risk.
While 70 per cent of the benchmark Bank Nifty's weight is split between ICICI Bank, HDFC Bank and SBI, Reliance Banking portfolio is well diversified with no stock accounting for more than 15 per cent of the portfolio.
The fund, however, has high exposure to public sector banks which may result in short-term underperformance given the lingering concerns. Mid-cap banks and NBFCs, though, helped it outperform its benchmark consistently in the last one-and-a half-years.
The fund outperformed its benchmark 87 per cent of the time over the last four years, on a rolling return basis.