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Once Bitten, Twice Shy

Should we invest in the new banking funds or learn from the technology sector disaster of 2001

Lately, the banking sector has been in the news a lot. But unfortunately, the sector has been grabbing headlines for all the wrong reasons. First it was the subprime crisis and its associated apprehension of its effect on Indian banks. When news of this crisis finally subsided, corporate India was hit by the losses in credit derivatives. Banks bore a major brunt of this loss with the ICICI Bank leading the way.

But despite these disheartening news, we find that four funds focused on the financial and banking sector have filed their offer documents with SEBI. The four funds in question are HSBC Banking and Financial Services Fund, ICICI Prudential Banking and Financial Services Fund, SBI Magnum Sector Funds Umbrella (MSFU) - Banking and Financial Services Fund and lastly ABN AMRO Banking and Financial Services Fund. Apart from these four, Sundaram BNP Paribas Financial Services Opportunities Ret is already open for initial investments. All of these funds propose to invest in Financial and Banking Sectors.

This sudden enthusiasm for the financial sector seems paradoxical considering the fact that questions are being raised at the financial institutions both domestically and globally on how they are managed and why they have hidden the risk associated with some of their products. Globally, the financial systems are in total chaos. The Indian financial sector however has been successful to a considerable extent in avoiding this global turmoil.

If we look at the various Banking indices that are flying around, we see that only in 2007 both Bank Nifty and S&P CNX Banks have delivered 10 per cent more return than S&P CNX Nifty. Before this, they were either underperforming or were at par with the Nifty. Though we had banking mutual funds in India from 2003 onwards and were dolling out decent enough returns, it's only in 2007 that we found that they were able to give excellent returns. Sadly enough, like all good things, the Banking story is also affected by the recent downturn in the stock markets. In past 3 months, where Nifty has just barely been able to remain in green, the Bank Nifty has been in a freefall, giving a negative return of 17 per cent. Only the Reliance Banking Fund has been able to hold its own and give a negative return of only 8 per cent. So, one begs to ask the question: why are we seeing so much interest in financial and banking sectors and that too now of all times?

One reason could be that in the past one year, net assets of the existing banking funds have grown at the rate of 24 per cent and compared to this growth, the increase in net assets of other categories have been dismal. This shows that the banking funds have been able to hold the attention of the investors. JM Financial Services Sector Fund recorded a jump of 100 per cent in its net assets in just one month last year. All of these points to only one conclusion, the fund companies are launching financial funds responding to investors' fondness to this sector.

Well, we are the investors and it looks like it's time to remind ourselves of a lesson from the past. The launch of too many specific sector funds could be a time to keep away from them. Remember 2001, technology stocks, technology funds and the way they betrayed our trust.

And just to further exemplify this point, take a look at the Kotak Tech Fund. Launched in March 2000, the fund is still struggling with an NAV of an embarrassingly meagre Rs 8. Lesson learnt?