Banking mutual funds have lost up to 6 per cent in the last week following the collapse of Silicon Valley Bank and Signature Bank that dented investors' sentiment in the banking and financial services space.

The failure of the two US-based banks sent shockwaves across the global financial system and weakened the sentiments in the banking sector in India too, wherein shares took a beating and declined in the range of 3-13 per cent in the week under review.

However, experts believe that the direct impact on the Indian banking sector was negligible to low.

The incessant selling in the bank stocks is clearly reflected in the banking sector mutual funds, as evident from the short-term performance returns of the 16 schemes under the category.

Of the 16 banking sector mutual funds, all of them have given negative returns to investors in the range of 1.6 per cent to 6 per cent in the week ended March 17, according to an analysis of data compiled by ACE MF Nxt.

So far this year, these funds have given negative returns ranging from 8 per cent to 10 per cent, the data showed.

The funds which have lost more than five per cent in the last week are Aditya Birla Sun Life Banking and Financial Services Fund, Tata Banking and Financial Services Fund, HDFC Banking and Financial Services Fund, LIC MF Banking and Financial Services Fund, and Nippon India Banking and Financial Services Fund.

However, on nine-month and 1-year time frames, the returns are positive, infact, all the banking and financial services funds have given returns of up to 20 per cent and up to 12 per cent, respectively, data showed.

The reasons for the fall in these thematic mutual funds can be attributed to the volatile stock market conditions and the rising interest rates. Ever since the rate hike cycle commenced, the expectations of lower net interest margins, higher cost of funds and impact on credit growth abound, Gopal Kavalireddi, Head of Research at FYERS, said.

With banks increasing the deposit rates with a lag, compared to the Repo rate hikes by the Reserve Bank of India (RBI), the impact was delayed but inevitable, he added.

Moreover, Foreign Portfolio Investors (FPIs) have been on a selling spree since October 2021, paring down their investment holdings in many banks and financial sector entities.

Silicon Valley Bank, which was a key funding source of startups, collapsed on March 10. This was followed by the failure of Signature Bank on March 12. In addition, Zurich-headquartered Credit Suisse is also in trouble.

However, experts believe that the Indian banking system is expected to remain unscathed from the troubles in Credit Suisse as it has a very small presence in the country.

The banking crisis seen in the US and Europe has had a negative impact on the sentiments on Indian investors as well. Bank stocks in India have also corrected, Alekh Yadav, Head of Investment Products at Sanctum Wealth, said.

"However, we believe the Indian banking system is much stronger. Banks are well capitalised, also rate hike action in India hasn't been as steep as the US and hence mark to market losses is relatively limited," he added.

Abhishek Dev, Co-founder and CEO-Epsilon Money Mart, said that long-term performance of markets and stocks are ultimately led by earnings and short-term prices are impacted by news flows and sentiments and perhaps that's played out in the banking stocks over the last week or two.

"The Indian banking sector overall, has strong balance sheets, healthy NIMs (net interest margins) and their bad assets are almost at a decade low. They may also have negligible exposure, if any, to the regional US lenders who have been subject of restructuring and behind these news flows," he said. According to him, such short-term volatility may also provide buying opportunities for long-term investors, there are many well managed banking and financial services mutual funds one can look to take exposure to.

FYERS' Kavalireddi suggested that investors can initiate their investments in the banking sector funds through a Systematic Investment Plan (SIP) mode as current interest rate hike cycle is approaching its finality, and a higher but stable interest rate environment is expected from the second half of the calendar year 2023.

"Banking stocks are susceptible to macro and micro economic factors, interest rate cycles, credit and deposit growth rates among other factors. Hence, these funds are suited for investors with sufficient understanding of the risk and a longer investment time horizon, to even out the volatility in stock movements and deliver sustainable returns," he added.

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