Mutual funds' exposure to bank stocks hits 19-month low

Amid continuing weakness in banking stocks, fund managers' exposure to the sector has dropped to the lowest level in more than one-and-half years at the end of July.

Mutual fund is an investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets.

According to latest data available with the Securities and Exchange Board of India (Sebi), the mutual fund (MF) industry's investment in banking stocks stood at Rs 28,862 crore as on July 31, accounting for 16.93 per cent of their total equity assets under management (AUM) of Rs 1.70 lakh crore.

This was their lowest exposure in the banking shares since December 2011, when the total value of mutual fund investments in banking sector stood at Rs 26,335 crore.

The mutual fund exposure to banking stocks had risen to a high of Rs 43,659 crore in December 2012.

Market participants attributed the decline in investment in banking shares to overall volatility in equity market.

Banks stocks are also under-performing broader market because of liquidity pressure due to various steps announced by the Reserve Bank of India (RBI) and deteriorating asset quality of public sector banks. Besides, bottom line of various public sector banks have also declined because of higher provisioning.

During July, banking index (bankex) crashed by more than 14 per cent, while 30-scrip sensitive index (Sensex) dropped by 1.2 per cent.

However, banking stocks continue to remain the most preferred sector for mutual funds, followed by software (12.91 per cent exposure), pharma (8.21 percent), consumer non-durables (7.78 per cent) and petroleum products (5.85 per cent).

In 2012, there was a consistent investment growth in banking stocks by the industry's equity fund managers and their exposure has risen from 17.23 per cent of total AUM in January 2012 to 21.15 per cent in December.

The increase in allocation of funds to banking stocks in 2012 was largely attributed to declining interest rates.

In July this year, banking was followed by software space where the mutual funds' investment stood at Rs 22,009 crore, while pharma sector accounted for Rs 13,997 crore, consumer non-durables Rs 13,258 crore and petroleum products Rs 9,979 crore.