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Reliance Banking Fund - Banking It Right

| 9/26/2011 4:34 PM Monday

The financial sector is the backbone of any economy, and more so for a growing economy like ours, which depends on it for streamlining investment, mobilising savings and guiding resource allocation. In an emerging economy like India, the financial sector has huge potential and usually grows at 1.5 times the nominal growth of the economy, which is expected to be around 12 to 15 per cent in case of India, translating into a growth of around 18 to 22 per cent for the sector. Exposure to this sector provides investors an opportunity for long-term wealth creation. In this context, we have chosen  Reliance Banking Fund, one of the largest and consistent performing banking funds.

Reliance Banking Fund is a multi-cap-oriented fund which, as the name suggests, primarily invests in banking sector companies. The fund focuses on select large-cap banks in the public sec-tor and higher beta stocks in the private sector. It also takes concentrated bets in select mid-cap stocks in the banking and financial sectors to generate an alpha for the fund. It actively manages allocation between PSU and private banks as well as NBFCs, depending on the environment and outlook.

The fund was launched in April 2003. Since April 2005 it is being managed by Sunil Singhania, one of the most competent, experienced and renowned fund managers in the industry. In terms of portfolio, the fund invests across market-caps with around 41 per cent net assets being invested in mega-cap companies, 27 per cent in large-caps and 26 per cent in mid and small-cap companies, as of August end. The fund actively does allocation shifts between PSU banks, private banks and NBFCs. In June 2010, it had around 54 per cent in PSU banks, 27 per cent in private banks, 13 per cent in NBFCs and five per cent in cash. This has changed to 45 per cent in PSU banks, 36 per cent in private banks, eight per cent in NBFCs and eight per cent in cash as of June 2011.

The fund usually does not take huge cash calls, and being a sector fund it is fairly concentrated, with around 20 stocks in the portfolio, out of which the top five stocks account for 50 per cent of its portfolio. In terms of performance, the fund has done wonders for its investors, generating returns at a 30.11 per cent CAGR since inception. The fund has also outperformed its category as well as the benchmark across all time periods, be it in the last one, three or five years. In the bear market of 2008, when the category average gave a negative return of 44.72 per cent, the fund fell by only 37.84 per cent. When the markets rebounded in 2009 and the category average delivered positive returns of 75.76 per cent, the fund outperformed the category, delivering 82.89 per cent returns. It continued to outperform the category in the year 2010, and on a YTD basis.

Most banking stocks have corrected by about 20 per cent over the last three months, trading well below their last five-year average valuation multiples. With interest rates expected to peak in the near term and after the recent correction, the sector looks promising from the medium to long-term perspective. However, the fund being a sector fund, investors should have a reasonable risk appetite to bear any volatility in the short term, and should not allocate more than five to 10 per cent of their equity portfolio to this fund.

 

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