Invest now to capitalise on credit growth pickup

Banking and financial sector funds, which lagged other equity fund categories in 2023 and 2024, are attractively positioned.

- SANJAY KUMAR SINGH & KARTHIK JEROME

Valuations are appealing. These funds could reward investors handsomely when credit growth picks up.

Causes for underperformance Banking sector funds underperformed in the past couple of years due to multiple factors. "The key ones were regulatory actions around the loan-to-deposit (LDR) ratio and increased risk weights in unsecured segments; uncertainties around slippages in unsecured loans; and concerns over slowing credit growth," says Roshan Chutkey, senior fund manager, ICICI Prudential Banking and Financial Services Fund.

Earnings growth and valuations also played a part. "Three years ago, earnings growth in the banking sector was around 13-14 per cent. However, many other sectors were growing at around 20-25 per cent, and their valuations were also cheaper," says Amey Sathe, fund manager, Tata Asset Management.

The sector bore the brunt of selling by foreign institutional investors. "Approximately 40 per cent of the selling has happened in financials," says Sathe.