• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Suresh Krishnamurthy

INVESTMENTS in the initial public offer of Reliance Banking Fund need not be considered. Sector funds have generally proved unsuitable for retail investors. Diversified equity funds have also partially taken advantage of particular sector trends eliminating the need for investors to take exposure to sector funds.

Reliance Banking Fund aims at generating returns by investing in equity/equity-related or fixed income securities of banks. The allocation to equity or debt could be between 0 and 100 per cent at any time depending on the fund manager's views.

Amenable banking

As a sector, banking is more amenable to sector-fund investing than other sectors. Banking is the lifeline of the economy and more than a handful of banks can be identified which have a high probability of surviving over the next decade. World over, banking stocks have generally fluctuated less vis-à-vis the market index suggesting that the risks are lower. In this backdrop, remaining invested in banking stocks for a longer period of time is possible compared to other stocks.

In addition, although banking sector stocks have appreciated sharply over the past six months, the potential for further increases in share price exists. This is especially true if recoveries of non-performing assets happen on a large scale. Further catalysts in the form of mergers and acquisitions and disinvestments by the Government may also materialise.

Sector perils

Investors, however, cannot escape the perils of sector-fund investing even in the case of a banking fund. In banking stocks, too, cyclicality is introduced by momentum-driven trading. Banking sector stocks swing between extremes depending on market fancy. This requires mutual fund investors to actively trade in the banking sector fund to add value. That may be beyond retail investors.

Indeed, Reliance Banking Fund managers have retained the option to move 100 per cent of the net assets into debt securities if banking sector valuations are unattractive. They will determine allocation to equity and debt of banking companies depending on relative valuations. In theory, this obviates the need for investors to trade in sector funds to add value. However, in India, the performance of most asset allocation and balanced funds has been unimpressive. Market timing has proved difficult to practice.

In this context, it would be better to avoid Reliance Banking Fund for now. Fresh investments can be considered on evaluation of the fund performance over the next year.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Vickers Systems: Accept

Copyright © 2003, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line