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Are MFs being over optimistic about this sector?
Thu, 26 Mar Pre-Open

The key to long term success and confidence in investing is to not just keep an eye on the upside, but to limit downside as well. It is with central idea that we regularly insist investors to ensure diversification in their investment portfolio, not just across asset classes, but across sectors and stocks within equity class.

In this context, the news that mututal fund managers - the agents who invest in stocks and bonds on behalf of investors have raised their stake in banking sector to Rs 780 bn in February 2015 is a bit concerning. One must note that at these levels, the investment in banking stocks is more than double of the amount that was invested last year. As per an article in Reuters, the banking stocks now account for 21.32% share of assets under management.

Ironically, while the MF's exposure to banking sector has been growing since long now, the fundamentals of the sector have been deteriorating. This is true specially in case of public sector banks. As we all know, the banking sector is facing bad debt crisis. While the reported bad assets numbers seems high enough, the rot is likely to be deeper with schemes like Corporate debt restructuring (CDR) floating around. The issue is big and grave enough to derail the potential economic recovery if serious steps are not taken.

At the same time, a lot of risk has been built in the valuations of the stocks in the financial secto. One can not rule out a good chance that these stocks may witness a correction as the froth settles down in the markets. So at a time when the fundamentals of the financial sector look weak and valuations seem high, over exposure to banking sector warrants caution. Hence, investors would do well to make sure that they keep their portfolios well diversified.

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