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Suresh Krishnamurthy

INVESTORS in Reliance Banking Fund can stay with the fund. Banking sector stocks offer a higher dividend yield to investors. In addition, because of the lower penetration of retail services offered by banks, the potential for growth also exists. Banking sector stocks offer one of the better exposures to take advantage of growth in the economy as well as the growing consumption of retail banking services by Indian consumers.

Suitability: A banking sector fund need not be considered as risky as other sector funds. The volatility of banking sector stocks, which measures risk, is generally expected to be lower than that of the market. That has been the case in the past.

Over the past 12 months, the volatility of banking sector stocks has increased. It, however, continues to be lower than that of the market.

Performance: The performance of the fund since its launch has not been impressive compared to BSE Bankex Index. Comparison to the Bankex Index may not, however, be ideal as three stocks — SBI, ICICI Bank and HDFC Bank — account for 78 per cent of its market capitalisation.

In this context, the 64 per cent appreciation recorded between May 2003 and January 2004 appears reasonable. The Bankex Index gained 70 per cent. Besides, the sharp inflows into and outflows from the fund over the past few months may have increased the cash position, dragging down performance.

Portfolio allocation: The fund has the option to invest in either debt or equity products offered by banks. Given the potential offered by banking sector stocks, the fund prefers equity to debt. Debt accounts only for a lower proportion of net assets.

At the end of January 2004, the fund had a cash position of about 33 per cent. The top five picks of the fund are State Bank of India, ICICI Bank, Vysya Bank, Corporation Bank and South Indian Bank. The fund prefers private sector banks to public sector banks. This does appear justified considering that private sector banks have been growing at a faster rate than public sector banks.

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