Over a year, problems such as slacking credit growth, increase in non-performing assets and tighter liquidity constraints following the fall in the rupee have seen banking stocks see-saw wildly.
Therefore, experts recommend if you can't stomach the volatility, don't take too much of an exposure to banking stocks or funds.
Banking is a high-beta sector and moves more sharply than the rest of the market on news.
Therefore, its volatility could be unnerving for retail investors.
Hiren Dhakan, associate fund manager, Bonanza Portfolio, says considering the volatility, it is better to stay away from the sector.
"We don't seen any incremental improvement in returns. “Also, the outlook is still not clear, because the Reserve Bank of India’s stance is mixed.
“We feel the sector is overvalued and overbought.”
According to data from Value Research, over a year, all banking funds have shown negative returns.
The one-year returns of the largest funds in terms of assets under management are: Reliance Banking (-9.6 per cent), ICICI Prudential Banking and Financial Services (-1.5 per cent), Sundaram Financial Services Opportunity Regular (-10.3 per cent), UTI Banking Sector (-11.4 per cent).
However, over a one-month and three-month periods, the returns are positive.
If you can see through the interim volatility, Dhakan advises an investment period of at least five years, since banking is high-beta.
Since banking and finance are critical for growth, any recovery could see the stocks do well. Many banks are trading below their book values and some public sector unit (PSU) banks are trading at attractive dividend yields.
Given many of the stocks are going cheaper, there's a possibility these funds could give better returns.
New fund launches are banking on this.
Lately, Birla Sun Life Mutual Fund launched Banking and Financial Services Fund on November 25. Mahesh Patil, co-CIO, Birla Sun Life AMC, says, "We feel a lot of stocks are available at attractive valuations, since all the negative factors are captured in the valuations.
Now gross domestic product growth is improving and bond yields have peaked. Even restructured loans have peaked and companies have started de-leveraging. So, from a two-to-three year horizon, the sector will do well."
Experts feel if one does not have any exposure, over a longer time frame, one can add some stocks. Says Vidya Bala, head of mutual fund research, FundsIndia, “Investors must be prepared to stay invested in such mutual funds for at least three years, since unlike other sectors, the stocks will take longer to give returns.
“The exposure to such funds should be not more than five-10 per cent and these should be used only to prep up your mutual funds portfolio,” Bala says.
However, you may invest only if you don't have an exposure, so as to participate in their upside.