Investors in banking mutual funds need to distinguish between cyclical headwinds and structural deterioration
Banking stocks led the market fall on March 30 with Bank Nifty taking the sharpest hit around midday. The index dropped about 2.8 percent to hover near 50,767 around 12 noon, as heavy selling in key banking names dragged the sector lower and weighed on overall sentiment.
The broader market was also under pressure. The Sensex was down 1,229 points, or 1.67 percent, at 72,354, while the Nifty 50 slipped 359 points, or 1.57 percent, to 22,461.
A significant drop in banking stocks has heightened worries among mutual fund investors, as confidence erodes following the Reserve Bank of India’s (RBI) instruction to all banks to cap their net open position on the rupee (NOP-INR) in the onshore deliverable market at $100 million. Banks are required to adhere to this guideline by April 10.
Experts say the RBI’s decision to limit banks’ net open positions in the currency market aims to decrease speculative trading but has also led to short-term pressure on banks’ treasury income.
Funds with the highest exposure to banking include HDFC Flexi Cap Fund (about 34 percent), Kotak Flexi Cap Fund (around 24 percent), Parag Parikh Flexi Cap Fund (roughly 20 percent), along with HDFC and ICICI Prudential Multicap Funds. Mutual fund investors, particularly those in banking or financial sector funds, should consider whether to maintain their investments or reduce their exposure.
What should you do?
Experts say there is no need to panic. Banking funds are naturally more volatile because they are concentrated bets on one sector.
Nitin Agarwal, CEO – Mutual Funds, InCred Money, says, “The recent weakness in Bank Nifty warrants a measured response rather than a reactive one.”
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If you are investing through Systematic Investment Plans (SIPs) in banking funds, the best approach is to continue. Market corrections allow investors to accumulate units at lower prices, which can improve long-term returns. Timing exits during volatility often leads to missed recoveries.
Kranthi Bathini, Director of Research at WealthMills Securities, said, “Investors should avoid panic selling and refrain from making short-term trades without proper risk management, such as stop losses. These actions can disrupt long-term wealth creation. SIPs should not be stopped. Instead, investors should continue investing in a staggered manner and use market dips as buying opportunities.”
The pressure on banking stocks has been driven by a combination of geopolitical tensions, elevated crude oil prices, and sustained FII outflows, factors that are largely external to the sector’s underlying fundamentals.
“Investors in banking mutual funds need to distinguish between cyclical headwinds and structural deterioration. Unlike earlier stress cycles, Indian banks are in considerably better shape today, with capital adequacy remaining healthy, NPA ratios having improved meaningfully, and credit growth momentum gradually picking up. The broad-based selling across both PSU and private sector lenders suggests a sentiment-driven correction rather than a fundamental re-rating of the sector,” said Agarwal.
However, if your portfolio has a high allocation to sectoral funds, it may be time to review. Financial planners usually recommend limiting sectoral exposure to a small portion of your overall portfolio, as these funds carry higher risk.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.