An open-ended banking & financial services sector scheme with the primary objective of investing in equities of companies engaged in the banking and financial services.

Summary

Type	An open-ended sector fund.	Benchmark Index	S&P BSE Bankex
Min. investment: Additional purchase: Minimum redemption amount:	Rs 5, 000/- and in multiples of Re 1/- thereafter. For Systematic Investment Plan (SIP), the minimum amount is Rs 500/- and in multiples of Rs 1/- thereafter. Rs 1,000 and in multiples of Re 1 thereafter Minimum of INR 500/- and in multiples of INR 1/- thereafter.	Plans: Options (under each plan):	Direct; and Regular   Growth; and Dividend (Re-investment and Payout)
Face Value	Rs 10 per unit	Expense Ratio:	Upto 2.50%
Entry Load	Nil	Exit Load:	2% if redeemed or switched out on or before completion of 18 months from the date of allotments of units. 1% if redeemed or switched out on or after 18 months and on or before 24 months from the date of allotments of units. Nil if redeemed or switched out after completion of 24 months from the date of allotments of units.
Issue Opens	March 9, 2015	Issue Closes:	March 23, 2015

 

Investment Objective*

The objective of the fund will be to provide investors with an opportunity to invest in a portfolio of a mix of equity and equity related securities and fixed income instruments. The allocation between fixed income and equity instruments will be managed dynamically so as to provide investors with long term capital appreciation.

*Source: Scheme Information Document

 

Is this fund for you?

LIC Nomura MF Banking & Financial Services Fund is an Open-ended banking & financial services sector oriented scheme. With the primary investment objective of investing in equity and equity related securities of companies engaged in Banking and Financial Services. As per the investment mandate the scheme will invest in banks and Non-Banking Financial Companies (NBFCs), insurance companies, rating agencies, brokerage houses, wealth management companies, housing finance companies, stock exchanges, commodities exchanges, etc. Hence LMBFSF is positioned as thematic fund aiming to capitalise on opportunities in the banking & financial services domain.

In the on-going bull phase, banking and financial stocks have witnessed a significant rally. Fund managers have greatly increased their exposure in banking stocks and in many cases the banking and financial sector constitutes more than 20% of the equity assets of mutual funds. The banking sector is generally considered as a proxy play on economic development of a country.

But is it really worthy betting on the banking & financial services theme?
Well, banks have been facing problems on the asset quality front. In simple words, banks are facing problems in recovering loans and interest due from the borrowers. Along with lapse in the risk management process, tough economic conditions and higher interest rates is also responsible for poor quality of assets of Indian banks. Until a few quarters ago, it was believed that, as the economy would recover, problem of Non-Performing Assets (NPAs) may become less serious. But latest quarterly results suggest that the worst may not be over just yet. Banks are finding it difficult even to recover restructured loans and many of the restructured loans have started turning bad. Also what is terrifying is, despite renegotiated terms restructuring of loans is not working for banks. Priority and infra sectors are the biggest sources of stressed assets. Developments such as cancellation of licences of captive coal mines and non-availability of gas and coal for power plants pose an even bigger threat to already stressed banking sector as borrowers are feeling the heat. In this the public sector banks are affected more than their private sector counterparts. Nevertheless, there are a few banks which have a good track record in containing NPAs with vigilant risk management in place.

Credit growth which had fallen to an all-time low of 9.8% in the fortnight ended September 2014 has only now started to pick up. The pickup is mainly due to working capital loan disbursals as project loan sanctions. Term loan disbursals continue to be muted and any substantial revival in credit growth can only be seen two quarters away.

Amid such times, portfolio construction can be a challenging task, especially as most stocks in the theme have already witnessed a run-up. However in the spectrum of financial services there are opportunities which further may appear luring in time to come. Nevertheless, in the backdrop of the above, LMBFSF is likely to be exposed to very high risk.

 

Portfolio Strategy

The primary objective of the scheme is to generate long term capital appreciation by investing in the equity and equity related instruments of Banking and Financial Services Companies that forms a part of the BFSI Sector and which are expected to show sustained growth and generate better performance. The portfolio manager will adopt an active management style to optimize returns. Income generation may only be a secondary objective; the scheme will primarily focus on opportunities in the banking & financial services sector. The scheme will invest in banks in India as they provide varied services in addition to the traditional banking services. The scheme will also invest in companies providing financial services. The spectrum of financial services is as follows:
 

• Non-Banking Financial Companies
• Stock Broking
• Insurance (life and non-life)
• Investment Banking
• Depository Services
• Leasing
• Credit Rating
• Wealth Management
• Payment systems

So, that’s how overall the Scheme holds a mandate to invest in both banks as well as financial Services companies. While investing, LMBFSF will adopt an active management style to optimize returns and follow a top-down approach to investing.

The asset allocation which will be followed by the fund will be as under:
 

Instruments	Allocation Range (%)		Risk Profile High/Medium/Low
	Minimum	Maximum
Equity & Equity related securities of companies engaged in banking & financial services.	80	100	High
Debt and Money Market instruments	0	20	Low

Notes: *Exposure to derivatives may be to the extent of 50% of the net assets.
Cumulative gross exposure through debt, equity & derivative position shall not exceed 100% of the net assets of the Scheme.
Exposure to securitized debt may be to the extent of 30% of the net assets.
The Scheme shall not invest in ADR/ GDR/ foreign securities/Foreign securitized debt.
The Scheme shall not invest in repo in corporate debt.
The Scheme shall not engage in short selling and securities lending

(Source: Scheme Information Document)  

LMBFSF will benchmark its performance to the S&P BSE Bankex, since its composition broadly represents the scheme’s investment universe.

 

Fund Manager Profile

Mr. Ramnath Venkateswaran has over 34 years of experience in financial markets and has a B. Tech degree from IIT Kharagpur and a PGDM from IIM Calcutta. He previously worked as a research analyst with Kotak International and as a business analyst with Tata Consultancy Services.

 

Fund Outlook

The funds outlook will hinged on the economic growth amid which how the banking and financial services sector performs will be deciding factor in the fortune of the fund. As cited earlier, since banks are saddled with rising NPA problems and restructuring of loans too not honing well; on the banking side portfolio construction would be challenging task. While a few banks have controlled their NPAs, valuations have run-up quite ahead. As the RBI reduces policy rates further in time to come (if macroeconomic variable are conducive to do so) it would be positive for the banking & financial services sector, which is rather interest sensitive. And possibly, this is one of the reasons why fund managers are increasing their exposure in banking and financial services stocks. They are betting that a combination of reducing interest rates, revival of economic growth and a reduction in non-performing assets will contribute to increasing profit margins as we see a revival in credit growth from decade lows.

 

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