The Hindu Business Line : Reliance Banking: Pare exposures

THE relentless upsurge in the prices of banking stocks has continued well into 2005 with the result that the Reliance Banking Fund, launched in May 2003, has accumulated returns of 210 per cent till date. Stocks in the banking sector are no longer undervalued.

The valuation of banking stocks now factors in earnings growth beyond the next two years. The risks to earnings growth has also risen. The case for over-weighting — that is, investing a higher proportion of your portfolio — in this sector does not exist now. While it is important to maintain exposure to the sector, investors who entered the fund in 2003 or 2004 could consider booking profits.

Performance: Reliance Banking has delivered returns of 210 per cent since launch. During the same period, BSE Bankex delivered returns of 180 per cent. In the past 12 months, Reliance Banking has delivered slightly lower average daily returns than the BSE Bankex.

The fund's fluctuations in net asset value, a measure of risk, have, however, been substantially lower. The fund has interestingly matched the performance of Bank BeES, an exchange-traded fund tracking the banking index — a test for the fund manager's skills. Given this performance, Reliance Banking needs to be considered the premier option for investing in banking sector funds.

Banking re-rated: The banking sector, specifically public sector banks, has been re-rated and accorded much better valuations by the market over the past 36 months. Stocks that used to return dividend yields of more than 5 per cent now trade at dividend yields of less than 2 per cent.

The BSE Bankex has gained 82 per cent in the past year, compared to the 56 per cent gained by BSE 500. The large banks that are part of BSE Bankex alone now constitute nearly 9 per cent of the total market capitalisation of the country.

If we include the market cap of other banks, non-banks and financial services companies, then the sector's weight in the market could go up to as high as 12-13 per cent. This reduces the case to invest a higher proportion in the banking sector.

Focussed on banks: Additional reason to pare exposures to Reliance Banking Sector Fund is the fund's strategy of investing almost entirely in banks.

A fund that invests in a range of financial services stocks would be a better alternative now considering the improvement in valuation of banking sector stocks.

As such, it would be better to partly sell your holdings in the fund and invest the proceeds in diversified equity funds or in appropriately valued stocks of non-banking financial services companies.

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