After targeting sectors like technology, pharmaceutical and fast moving consumer goods (FMCG), mutual funds (MFs) are now aiming for the banking sector. Three MFs - Benchmark, Lotus and Tata MF - have filed draft offer documents for their upcoming banking sector schemes. Of these, Benchmark MF will launch two schemes, one each targeting the private and public sector banks. More are expected to join the fray. 

Attractive prospects
MFs see good prospects in the banking sector because of a number of positive factors. While banks are expected to implement Basel II norms by April 2008 that would result in stronger risk management practices, after 2009 foreign banks will be allowed to acquire Indian banks. Bankers feel this will consolidate the sector. Further, an increased growth in loans and credit offtake coupled with technology upgrade has also helped banks register growth. 

Active vs passive
Unlike most existing banking schemes that are actively managed, most of the upcoming schemes will be passively managed. Benchmark MF's two schemes as well as the one from Tata MF will be exchange-traded funds (ETFs). Lotus India Banking Fund will passively manage at least 65 per cent of its portfolio, which will be benchmarked against CNX Bank index, and actively manage the rest. 

Beware of the risks
The fortunes of banking MFs, like sectoral schemes, depend solely on the banking sector. Any spike or crash in the sector will have a similar impact on your banking fund. Further, expect high scrip concentration. As the benchmark CNX Bank index consists of only 12 scrips, with the top three scrips forming 67 per cent of the index, you can expect banking funds to be similarly concentrated. 

To counter this, actively managed funds have a provision of diversifying into financial services sector companies too. Already scrips like India Infoline [Get Quote], Power Finance Corporation [Get Quote] and Sriram Transport Finance Company are present in the portfolios of ongoing actively managed banking funds.