Are Banking Sector Mutual Funds Worth Risking Your Money?
Mar 07, 2018

Author: PersonalFN Content & Research Team

Perpetual SIP

We have some bad news and some good news.

The bad news: Frauds and scams have exposed the government and the banking regulator — clearly RBI was napping.

The good news: The government and RBI are willing to learn from their mistakes this time.

The Punjab National Bank (PNB) scam has turned into a nightmare for the entire Indian banking system and the Public Sector Banks (PSBs) in particular. What appeared to be the branch-level fraud initially is now emerging as a full-blown crisis.

As many as 31 banks are affected directly or indirectly by the PNB fraud — one of the biggest scams in the history of Indian banking industry.

Government agencies have swung into action faced with the tough task of protecting their credibility. They are leaving no stone unturned to uproot the problem. At least, they are demonstrating an attempt to get the perpetrators of frauds — the Modis and Choksis back to India.

As they say, “when the elephants fight, it is the grass that suffers.” 

It’s unsurprising that banks are playing the blame game. Who will bear the losses incurred from the massive fraud last month?

The RBI has already started taking action against banks for flouting norms. Recently, it fined Axis Bank and Indian Overseas Bank (IOB) for under-reporting Non-Performing Assets (NPAs) and a breach in Know Your Customer (KYC) norms.

As reported by the DNA dated March 07, 2018, the consortium of 31 banks led by the ICICI Bank lent Rs 6,800 to Mehul Choksi promoter Gintanjali Gems. The Serious Fraud Investigation Office (SFIO) summoned the CEOs of ICICI Bank and Axis Bank for interrogation.

The market has reacted negatively to these developments. Until now, it only punished the Public Sector Banks (PSBs) for their poor governance. However, with the first instance of the fraud having intersected the public and private sector banks, it has punished the private sector banks as well.

The banks were already battling the massive pile of bad assets. Now, frauds and scams have caught them on the wrong foot.

The ‘fake diamonds’ are making retail investors, bankers, taxpayers, and the government poorer day by day. With plummeting stock prices, investors are losing money. Being the biggest shareholders in PSBs, the government’s wealth is being eroded incessantly.

Banks are staring at the glaring losses with their NPAs. And unfortunately, in the end the taxpayers will have to pay for the frauds.

Financials—Falling out of favour…

(Data as on March 06, 2018)
(Source: ACE MF, PersonalFN Research)

From the chart above, you can see that the poor performance of financial stocks has dragged the entire market to its feet. From 40%, the weightage of financials in the Nifty 50 index has dropped close to around 35%, as per the data published by NSE on February 28, 2018.

Foreign Institutional Investors (FIIs) and Domestic Institutional Investors, both, seem to have pared down their exposure to financial stocks. On the other hand, the weight of Information Technology sector has moved up from the lows of 8% to nearly 13%.

You see, these sectoral rotations make it difficult for investors to decide how attractive they are. Until recently, many investors believed that, financial stocks will continue to dominate the Indian markets—especially the private sector banks.

But soon after the PNB fraud case showed the ripple effects, this perception changed. No investor is steering clear of financial stocks. IT stocks were considered the ugly duds not long ago. Suddenly, investors are finding refuge in them.

Considering all these twists and turns, you should avoid investing in sectoral funds — no matter how attractive they might appear. The prospects for any sector change dramatically without any prior notice. Therefore, it’s always advisable to invest in a diversified equity fund for long-term gains.

While you do that, make sure you are investing in a fund with a proven track record. You should mind your financial goals and the risk appetite before investing in any mutual fund scheme.

When investing in equity oriented funds, it’s preferable to go the SIP (Systematic Investment Plan) route. This empowers you to take advantage of choppy market movements, without bothering about timing the markets.

Editor’s Note:

PersonalFN understands that not all investors are equipped to select the best mutual fund schemes for their portfolio. It takes hours to analyse mutual fund schemes to arrive at the right list of the best ones. We, at PersonalFN, save you the trouble. Let us take care of all the tedious number-crunching work for you.

SIP is only a method of investing in mutual funds. To support this investment method, you first need to pick the right mutual funds. PersonalFN offers a report titled "The Super Investment Portfolio – For SIP Investors."

After a rigorous shortlisting process, PersonalFN goes a step ahead when selecting funds that are SIP-worthy. At PersonalFN, we conduct a detailed analysis on how SIPs in the top shortlisted funds have performed across multiple market conditions and timeframes. Only those funds that successfully pass this evaluation are suggested in the report.

You can read more about it and subscribe to: The Super Investment Portfolio – For SIP Investors

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