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ICICI Prudential Mutual Fund - Mutual Funds

Is this the right time to invest in ICICI Prudential Banking and Financial Services Fund

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Mutual Funds article in Advisorkhoj - Is this the right time to invest in ICICI Prudential Banking and Financial Services Fund
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Banking and Finance comprise nearly 30% of the frontline Nifty 50 index and is by far the largest sector in the index by market capitalization. In fact, Bank Nifty, the index of 12 large cap banking stocks is one the most popularly tracked indices after the Nifty and Sensex. The daily closing chart of Bank Nifty over the last one year shows that the index has fallen nearly 25%. There is no denying that the market has been brutal to the banking sector in the last one year. We are in the bear market territory as far as the bank Nifty is concerned.


Mutual Funds - The daily closing chart of Bank Nifty over the last one year shows that the index has fallen nearly 25%


However, it is also true that, bear markets represent the best investment opportunity for long term investors, because they can make extraordinary returns in the medium to long term. In this article, we will review one of the best banking sector funds, the ICICI Prudential Banking and Financial Services Fund. This mutual fund scheme gave the highest returns among all banking sector funds in the market in the last 3 to 5 years. At the outset, we should mention that, sector funds are more risky than diversified equity funds, because sector funds are exposed to more unsystematic risks compared to diversified equity funds. However, smart investors can get outstanding from sector funds can outperform diversified equity funds, if they time their investment well.

Is this a good time to invest in banking sector funds?

It depends on your investment horizon. One cannot be sure, if the market, especially the banking and finance sector has bottomed out. Though the Nifty has recovered somewhat from its January lows, the Bank Nifty is still near the lows. The FY 16 Q3 earnings were a mixed bag and therefore more short term pain may be in store. But if you have a long term investment horizon, then this may represent a good buying opportunity in some high quality banking and finance stocks through good banking sector funds, like the ICICI Prudential Banking and Finance Services Fund. After all, a 25% fall in the leading Bank index, by common sense logic, implies a decent buying opportunity. Also you should note that while the Bank Nifty has fallen 25%, select banking stocks, which include the largest banks of India, have fallen 40% or more. As discussed above, Banking and Finance is one of the most important industry sectors as far as our market is concerned and in fact, the fortune of Nifty is strongly connected with the fortune of Bank Nifty, given the weight of banks in the Nifty. When the economy and market recovers, it is very likely that, the banking and finance sector instead of underperforming the market, will outperform it. In bull markets, banking sector stocks and funds usually do extremely well. The chart below shows the annual returns of ICICI Prudential Banking and Financial Sector Fund, as well the average returns of the Banking sector funds, since 2009.


Mutual Funds - The annual returns of ICICI Prudential Banking and Financial Sector Fund, as well the average returns of the Banking sector funds, since 2009

Source: Advisorkhoj Research


While banking sector funds on an average did very well during bull market years, ICICI Prudential Banking and Financial Services Fund delivered outstanding returns in 2009, 2010, 2012 and 2014. Even during market corrections, the ICICI Prudential Banking and Financial Services Fund outperformed other banking sector funds. You will also notice that the fund delivered very high returns in the years following correction in the market. While by no means, one should infer that fund’s return in 2016 will be similar to 2009, 2012 and 2014, the point here is that, cyclical sectors led by banking recover faster in a bull market than other sectors.

Fund Overview

The fund was launched in August 2008. It has around 870 crores of Assets under Management and has an expense ratio of 2.52%. Vinay Sharma is the Fund Manager of ICICI Prudential Banking and Financial Services Fund. The fund has given 16.8% compounded annual returns since inception. Morningstar has a five star rating for this fund. The fund invests in large cap banking and finance stocks. Banks comprise 71% of the fund portfolio while non banking finance companies comprise 26%.

The table below shows the top 10 holdings of ICICI Prudential Banking and Financial Services Fund.


Mutual Funds - The top 10 holdings of ICICI Prudential Banking and Financial Services Fund

Source: Advisorkhoj Research and moneycontrol.com


In the chart above, you can see that there is a wide variation of P/E multiples even between private sector banks. While HDFC Bank and Indusind Bank are trading at P/E in the 20s, ICICI Bank, Axis Bank and Yes Bank are trading P/E in the low 10s. When the market recovers, it is likely that the good private sector banks trading at very low P/Es will catch up with their better performing peers in due course in terms of valuations, and in the process will give fantastic returns to the investors. When that happens, is contingent on a number of factors and not easy to determine, but as discussed earlier, given very low valuations, this might be a good time from a timings perspective.

The portfolio of ICICI Prudential Banking and Financial Services Fund is relatively light on public sector banks, which carry the significantly larger share of the NPA issues. Public Sector banks comprise only 10 – 12% of the portfolio. State Bank of India (SBI) is the largest PSU Bank holding of the portfolio and currently SBI is trading at single digit P/E multiple.

Performance

While the volatility of returns of ICICI Prudential Banking and Financial Services Fund is expectedly on the higher side compared to many diversified equity funds, it is lower than the average volatility of the banking and financial services funds category.

In terms of performance against the benchmark S&P BSE Bankex, the fund has consistently outperformed the benchmark. The chart below shows the 1 year rolling returns of the fund since inception. Rolling returns are the annialized returns of the scheme taken for a specified period on every day/week/month and taken till the last day of the duration. In this chart we are showing returns on every day during the specified period and comparing it with the benchmark. The orange line shows the 1 year rolling returns of ICICI Prudential Banking and Financial Services Fund (Growth Option) and the black line shows the 1 year rolling returns of the benchmark S&P BSE Bankex. We can see that the fund has consistently beaten the benchmark from 2011 onwards.


Mutual Funds - The orange line shows the 1 year rolling returns of ICICI Prudential Banking and Financial Services Fund (Growth Option) and the black line shows the 1 year rolling returns of the benchmark S&P BSE Bankex

Source: Advisorkhoj Research


The orange line in the chart below shows the growth of 1 lac investment in the NFO of ICICI Prudential Banking and Financial Services Fund.


Mutual Funds - The orange line shows the growth of Rs. 1 lac investment in the NFO of ICICI Prudential Banking and Financial Services Fund

Source: Advisorkhoj Research


A 1 lac investment in the NFO would have grown to almost 4 lacs at the beginning of 2015 and is currently around 3.1 lac.

The SIP returns of the fund are also quite impressive. The orange line shows the investment value of 3,000 monthly SIP in ICICI Prudential Banking and Financial Services Fund since inception.


Mutual Funds - The orange line shows the investment value of Rs. 3,000 monthly SIP in ICICI Prudential Banking and Financial Services Fund since inception

Source: Advisorkhoj Research


The current value of the SIP would be almost 5 lacs, with a cumulative investment of just 2.7 lacs. If investors expect volatility in the market to continue to for some more time, they can take advantage of the volatility by investing through SIP, instead of waiting for a confirmation of market bottom.

Future Outlook

The future outlook of this sector and especially the fund is bright, if one has an investment horizon of 3 years or more. Over the last three years the macros of our economy has been steadily improving. The improvement has been across almost all important macro parameters like Fiscal Deficit, Current Account, CPI Inflation, Government Bond yields etc. With the fiscal deficit improving and CPI inflation moderating over the past 12 months, the RBI has initiated an accommodative monetary policy stance. Lower crude prices have also helped rein in inflation, despite rise in food prices. In its recent policy meeting, the RBI governor has reiterated his accommodative stance. If the macros continue to improve, we will see further rate cuts this year, which will be a plus for the banking sector. Further, from April, as the banking system moves to an era of marginal cost of fund-based lending rates, interest rates in general will trend lower, and transmission of pending policy rate reductions of last year will also happen. While we cannot say at this stage that we have seen the worst of the stressed assets situation, at some stage the NPAs will bottom out. FII outflows over the past few months have impacted the share prices of large cap banks adversely. However, the FII sell off was triggered off more by external factors, like crude prices and concerns related to China. FII flows are expected to resume when crude stabilizes, which will have a favorable effect on the share prices of large cap banks.

Risk Factors

Food inflation is one of the key concern areas for the RBI. While normal monsoon is expected this year, deficit in rainfall will have an adverse affect on food inflation. Potential rate hikes by the US Federal Reserve will also constrain the RBI ability to lower interest rates. If the global macro-economic weakness persists or worsens, there will be an impact on the Indian economy and the banking sector. The stressed assets situation can get worse before it gets better.

Conclusion

ICICI Prudential Banking and Financial Services Fund is one of the best banking sector funds. The deep correction in banking stocks presents an attractive investment opportunity for long term investors to get excellent returns on their investment. If we look at Sensex returns over the past 15 years, every major correction has been a great wealth creation opportunity. Whenever the Sensex corrected by 15% or more, the three year returns from the lows have ranged between 90% to over 300%. Investors should consult with their financial advisors if ICICI Prudential Banking and Financial Services Fund is suitable for their investment needs.

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Advisorkhoj Research Team

Our research team has a combined experience of nearly 40 years in the financial services management and distribution, across the entire spectrum of product classes including mutual funds, insurance, equity broking and loan products. To contact our research leads, please see their contact information below.

Dwaipayan Bose: dwaipayan@advisorkhoj.com
Pradip Chakrabarty: pradip@advisorkhoj.com

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