Banking fund a good option for those bullish on the sector

Banking sector has shown good growth in recent quarters despite of the Non Performing Loans' (NPL's) problem affecting the sector. Investors having a bullish view on the sector can  make a safe bet on investing in open ended equity banking sector.

There are several quality funds that can be looked at by serious long term investors bullish on the sector. ICICI Prudential Banking and Financial Services Fund and  Reliance Banking Fund are amongst the top performing funds in the category. The track record for both the funds is excellent with the 5 years CAGR return being 17.42 per cent for ICICI fund and 12.73 per cent for Reliance Banking fund.

When comparing both the funds the expense ratio for Reliance Banking fund is 2.10, considerably lower than the 2.42 expense ratio  for ICICI prudential banking and financial services fund. The asset size for Reliance Banking fund stands at Rs. 2,099 crores versus the asset size of Rs. 954 crore for ICICI fund which explains the difference in the expense ratio.  On a YTD basis the ICICI fund has generated 11 per cent returns. Over a 3 year period the returns stand at 22.88 per cent for ICICI fund while that for Reliance banking fund they stand at 18 per cent on an annualised basis over 3 years.

For ICICI fund that invests in banking  sector the strategy adopted is to invest in both growth stocks and value stocks in the banking sector while maintaining focus on the large cap stocks. Only three per cent of the portfolio is allocated in the small cap stocks with 38 per cent being allocated to Mid-cap banking stocks. HDFC Bank enjoys the top allocation followed by ICICI Bank, IndusInd Bank , Axis Bank and Federal Bank.

For Reliance Banking fund the strategy is similar to that of ICICI Prudential banking and financial services fund, where the fund focuses purely on Large-cap banking stocks with a blend of growth and value stocks. HDFC Banks remains a top holding for this fund as well, followed by ICICI Bank, Axis Bank and Yes Bank. 

If we compare the performance of both the funds, ICICI Prudential Banking and Financial Services fund clearly outperforms Reliance Banking on key parameters like generating alpha and share ratio. ICICI fund has delivered an alpha of 6.48 compared to an alpha of 2.69 for Reliance Banking fund. 

Alpha for a fund reflects the excess returns of a fund relative to the return of a benchmark index. 

Even on parameters such as risk adjusted returns as reflected by Sharpe Ratio, ICICI Prudential fund reflects a better performance historically. Sharpe ratio for ICICI Prudential fund stands at 0.61 versus 0.45 for Reliance Banking fund. 

Sharpe ratio indicates the returns generated by funds for per unit of risk undertaken. Thus higher the Sharpe ratio better the fund performance is.