Which banking sector fund will you choose?

Arnav PandyaThere has been a crisis in the Indian banking sector in recent times with the surge in non-performing assets and the consequent crackdown by the Reserve Bank of India to get the banks to show the true situation. While the cleanup of the books is under way there is an area that mutual fund investors should look carefully at which is the space of banking funds. These are funds that invest just in the banking sector and hence there might be several investors who have money invested here or might want to look at this as an investment option. The choice within the space is huge and hence here is a look at what one can expect. NatureThe banking funds that are available for investors would fall in the category of sector funds as they invest in just a single sector which is banking. This leads to a higher amount of risk for the investor because the performance of their fund depends on just a single sector and hence this could diverge from the overall market in a significant manner. These funds are meant for investors who have a proper knowledge of the market and are hence able to take a higher amount of risk in the process and also they could have a larger portfolio so that there is an ability to diversify the overall holdings.Banking fundsThere are some banking funds that follow the traditional path to creating a portfolio in the sense that these would have banking stocks from all the sub sectors within the banking space. This would mean public sector banks plus private sector ones and even smaller players who are listed on the stock exchanges. The manner in which this portfolio is created is the traditional way which is that the fund manager will look at the benchmark and then try and beat the benchmark by selecting those banks that are expected to fare better. This will also mean that the larger banks in terms of market capitalisation will have a bigger exposure in the portfolio. An investor who wants a plain vanilla type of banking fund should select one of these options.Public sector banksThere are also funds present which will give an exposure to the public sector banking space only. There are a large number of banks from this space which are present and hence it would be easy for the fund manager to have these in the portfolio. But the investor should understand that going in for such an option means that they are increasing their risk even further. On one hand the risk is already elevated due to the fact that this is a sector fund but even within this if the field is further narrowed then there is going to be a rise on this front which only certain investors would be able to bear.Index linked fundsAnother option that is quite common when it comes to banking funds is that of taking an exposure to an index linked fund. This is easy to do as the portfolio of the fund comprises the exact replica of the index but it could mean that the fund manager has little choice in terms of selection. This is important when it comes to a sector index because it would result in a few banks having a disproportionate higher share of the portfolio and this can skew the risk quite a bit. The cost for these funds is low but when an investor is looking to select these funds then they need to think long before being certain that the fund will meet their needs.