Should you bet on banking sector MFs?

Looking at the markets, the banking index S&P BSE Bankex is trading at its all-time high of 35,717. Many investors might be considering this as a great opportunity to invest in the banking sector MFs. So, should you consider investing in banking sector funds now?

Banking sector funds provided an average return of 14.50 per cent, 18.72 per cent and 12.46 per cent for a time period of 1-year, 3-year and 5-year period, respectively. The category beta stands at 0.95 which is slightly less than that of the index which is equal to 1. So, now let us look at how the banking index actually performed in the same period, i.e., in 1-year, 3-year and 5-year. Here by banking index, we are referring to S&P BSE Bankex index. The returns in 1-year, 3-year and 5-year stood at 20.45 per cent, 21.08 per cent and 15.90 per cent, respectively. If we look at the returns then in every period, despite active management, banking sector funds failed to beat the index.

Now, let us try to figure out how did banking sector index funds/ETFs perform. Taking the same 1-year, 3-year and 5-year period, banking index funds/ETFs on average gave returns of 20.11 per cent, 22.19 per cent and 16.80 per cent, respectively and in risk terms, the beta is 1.15 which is more than that of index as well as banking sector MFs. However, this is the result of the tracking error. Though we can see the index funds/ETFs beating the index returns along with slightly higher beta than the index, they are actually on par with the index. Index funds and ETFs are managed passively and their returns are highly correlated with those of index that they are tracking.

So, as an investor what should be your approach, whether to invest in banking sector funds or invest in banking index funds and ETFs? Definitely investing in banking index funds and ETFs would be a better idea. This will ensure that on an average you get the market returns. However, here the thing to note is that due to active management in banking sector MFs, there is more room for a fund manager to limit the risk by taking the right call at the right time which is not possible in case of index funds or ETFs.