After recent surge, enter gradually via SIPs with 5-yr view

While the Sensex is up a meagre 3.5 per cent over the past year, banking and financial services sector funds have returned an average of 11.5 per cent. After this runup, however, investors need to be cautious while entering these funds.

- KARTHIK JEROME

Earnings-driven rally

An accommodative regulatory environment has strengthened the sector's fundamentals. “There is lower pressure on liabilities today than last year. The proposed regulatory changes on liquidity coverage ratio (LCR), project provisioning, and risk weights have been more supportive of growth than those suggested in the draft regulations,” says Milind Agrawal, fund manager, SBI Banking & Financial Services Fund.

The lending segment - comprising small and mid-cap banks, PSU banks, non-banking financial companies (NBFCs) and large private banks — has led the rally.

“System-wide credit growth has edged up to around 11 per cent year-on-year. Banks’ earnings in the second quarter of FY26 exceeded expectations. Net interest margins (NIMs) surprised positively, aided by prudent liability management and a favourable product mix,” says Preethi R S, fund manager, DSP BFSI (banking, financial services and insurance) Fund. Asset quality concerns in unsecured lending have eased.

Rally’s continuation hinges on growth