The mutual fund houses have been investing heavily in the equities of the banks and financial companies, despite both the sectors reeling under severe stress in the past few years.
According to a DH analysis of data available with the market regulator Securities and Exchange Board of India (SEBI), the growth in the allocation towards the financial sector by MFs is 1.3 times that of the growth in the allocations towards the entire equities basket during the past four years.
At the end of November 2019, the allocation of mutual funds with the banks and the financial institutions stood at Rs 4.18 lakh crore – making up 35% of the Rs 11.87 lakh crore allocation towards the equities in the country. Four years back, in November 2015, the same number stood at Rs 1.12 lakh crore – making up 27% of the Rs 4.21 lakh crore investments in equities in 2015.
During the four years, between November 2015 and November 2019, the investments into banks witnessed a compounded annual growth rate (CAGR) of 35.7% to Rs 2.99 lakh crore from Rs 88,000 crore.
Investments in the financial companies have seen 48.7% CAGR to Rs 1.19 lakh crore from mere Rs 24,422 crore.
On the other hand, the total investments into equities by the mutual funds, during the period, have surged by a CAGR of only 29.6% -- to Rs 11.87 lakh crore from Rs 4.21 lakh crore.
Experts say that most of this money has been parked with the blue-chip stocks on benchmark indices – Nifty and Sensex – which is quite in line with the polarised returns in the equity markets.
“Significant allocation to financial bell weather stock will expose investors to sector concentrations which they will have to diversify out using ETF or other asset classes,” said Anubhav Shrivastava, Partner, Infinity Alternatives.
This surge in the wealth of the investors has happened despite the overall banking sector being burdened by the bad loans in excess of Rs 9 lakh crore – which has had a severe impact on their profitability. Also, the shadow banks have seen a severe liquidity crunch after the Rs 90,000 crore default by IL&FS revealed a high degree of asset-liability mismatch in the sector.
The banks and financial institutions have been the biggest beneficiaries of the surge in the equity markets in the past few years now. The 23 financial companies have seen the wealth of investors surge by Rs 15.9 lakh crore between 2014 and 2019, with a compounded annual growth rate of 27% in their average share price.
At the end of FY14, the financial companies contributed 32.4% of the total shareholder wealth created by India Inc. The top wealth creators in the banks include HDFC Bank (Rs 4.08 lakh crore), Kotak Mahindra Bank (Rs 1.8 lakh crore) and Axis Bank (Rs 1.21 lakh crore).
As the shadow banks in India started reeling under severe fund crunch, investors started shifting towards the safer stocks like HDFC and Bajaj Finance, who have created wealth worth Rs 1.8 lakh crore and Rs 1.6 lakh crore respectively during the five-year period.