Investors can hold the units of UTI Banking Fund which invests in stocks of banking and financial sector. The fund has been a consistent rather than top performer in the banking space.

Over five- and seven-year periods, the fund returned an annualised 9.8 per cent and 12.3 per cent, respectively.

Its benchmark, CNX Bank Nifty, returned 8 per cent and 10.5 per cent during the same periods.

Sector outlook

After underperforming in the preceding year, banking stocks have made a comeback in 2012. The year-to-date return of the CNX Bank Nifty is 43 per cent relative to 22 per cent on the Nifty. Banking stocks rose on the back of a peaking out of the interest rate cycle, surprise cut in reserve ratio and recent reform measures.

According to Bloomberg estimates, the earnings growth of stocks in CNX Bank is expected to be 15 per cent compounded annually over the next three years as compared with 10 per cent growth in case of Nifty companies.

With banks reducing lending rates, offtake of credit may improve. A fall in interest rates and revival in economic activity from next fiscal may also reverse the trend of rising asset quality.

The price-to-earnings and price-to-book valuation multiples of banking stocks as represented by CNX Bank Index are below the five-year average.

Performance, portfolio

Given this backdrop, investors can hold UTI Banking Fund. Fresh investments can be, however, avoided given that among banking funds Reliance Banking Fund continues to be the top performer from a longer-tern time frame.

Investors who do not hold any banking fund and are looking to take exposure can consider systematic investment route in UTI Banking Fund.On a risk-adjusted basis, UTI Banking Fund’s returns are slightly better than exchange traded funds, which passively mirror the index.

As a thematic fund, UTI Banking Fund does suffer from the risk of underperformance if the sector in which it invests is out of favour.

But the fund managed to contain the downside better than the Bank index during the 2006, 2007 and 2008-09 corrections. The fund tends to shift to cash and fixed deposits during prolonged periods of correction. For instance, cash and fixed deposits accounted for 44 per cent during February 2009 lows and 27 per cent during December 2011 lows.

During the November 2010 to December 2011 fall, UTI Banking underperformed due to very high exposure to public sector banks’ stocks, which lost close to half their value during this period.

In spite of increasing cash holdings during this period, the fund had higher weights for public sector banks than CNX Bank Index most of the period, leading to its underperformance.

But even as the fund had higher cash and fixed deposit holdings, it managed to match benchmark returns in the market rally which began in December 2011. Holdings in stocks such as ICICI Bank, HDFC Bank, IDFC, IndusInd Bank and Yes Bank helped the fund prop up its returns.

The fund holds 27 stocks in its portfolio, with the top five stocks accounting for 72.5 per cent of the total exposure. This makes the fund more diversified than the index, which represents 13 stocks and top five stocks account for 85 per cent of the portfolio.

The NAV of the fund is Rs 44.35.

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