December 25, 2024
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Mutual funds increase exposure to banking, IT stocks
The performance of banking and information technology (IT) stocks has notably reshaped the composition of diversified mutual fund (MF) portfolios. Over the past two months, these sectors have gained substantial dominance, now accounting for nearly 30% of total allocations in many diversified MFs. This shift reflects both the strong performance and growing investor interest in these sectors.
While the broader market, as represented by the Nifty 50, fell by 6.5% in October-November, the Nifty IT index rose 2.9%, and the Nifty Bank index declined by just 1.7%. As a result, stocks like Axis Bank, ICICI Bank, State Bank of India, and TCS have emerged as top picks for mutual funds.
In their year-end outlooks, fund houses and brokerages have expressed optimism about both sectors. For banking stocks, the favorable valuation trends have drawn attention, while the bullish stance on IT stocks is driven by expectations of a sector recovery.
“While growth rates are converging between the broader market and banks, valuations have moved in opposite directions. Bank stocks are trading at a price-to-earnings (PE) ratio below their 10-year average, at 15x, and are currently trading at a 35% discount to the Nifty 50—three times the historical average. We remain bullish on private banks over PSU banks due to their lower valuation gap and superior profitability. The banking sector, across market capitalizations, remains attractively valued,” said Tata Mutual Fund.
According to a report by Nuvama Alternative & Quantitative Research, the weight of banking stocks in mutual fund portfolios surged from 15.7% to 16.5% in the past two months. Meanwhile, IT sector exposure rose from 11% to 12%.
The recent outperformance of IT stocks has been driven by positive comments from US companies, coupled with expectations of US interest rate cuts. Additionally, domestic IT companies are expected to benefit from increased spending on emerging technologies.
“India’s IT services sector is poised for sustained growth, driven by investments in emerging technologies like Artificial Intelligence (AI), blockchain, and cybersecurity. Cloud services will continue to see strong demand, reinforcing India’s position as a key player in the global tech ecosystem. The rise of generative AI, with demand expected to grow 15-fold between 2022 and 2027, presents a significant opportunity for Indian IT firms,” said ITI Mutual Fund.
The increased allocations to banking and IT stocks have come at the expense of other sectors, including consumer, capital goods, NBFCs, automobiles, and oil and gas. Pharmaceuticals, however, has seen a notable increase in allocation as well.
“IT stocks, having recovered from their lows following rate cuts, may continue to perform well in 2025 as discretionary spending picks up, barring any unexpected tariffs. Banks may also see a recovery post-rate cuts, with potential growth in credit demand. Additionally, the recent 50 bps CRR cut is expected to boost liquidity and credit growth in the banking sector,” said Deepak Ramaraju, Senior Fund Manager at Shriram AMC.
Experts suggest that the market may face continued pressure in the coming months, given global uncertainties and a slowdown in the domestic economy. As a result, careful sectoral and stock selection will be crucial for fund managers in 2025.
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