Banking mutual funds fell as much as 6% last week as the collapse of Silicon Valley Bank and Signature Bank rattled investor sentiment in the banking and financial services sector.

The collapse of the two US-based banks sent shockwaves through the global financial system and dampened sentiment in the banking sector in India as well, where shares were battered and fell 3-13% over the course of the week under review.

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

Read also | Silicon Valley Bank’s collapse will impact India’s startup ecosystem, experts say

The relentless sell-off in bank stocks is clearly reflected in mutual funds in the banking sector, as evidenced by the short-term performance of the 16 plans in the category.

Of the 16 mutual funds in the banking sector, all gave negative returns to investors in the range of 1.6% to 6% during 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% to 10%, according to the data.

Funds that lost more than 5% 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, over nine-month and one-year periods the returns are positive, in fact all banking and financial services funds have given returns of up to 20% and up to 12%, respectively, according to the data.

The reasons for the decline of these thematic mutual funds can be attributed to volatile stock market conditions and rising interest rates. Since the start of the rate hike cycle, expectations of lower net interest margins, higher cost of funds and impact on credit growth have abounded, said Gopal Kavalireddi, head of research at FIERS.

With banks raising deposit rates with a lag from Repo rate hikes by the Reserve Bank of India (RBI), the impact was delayed but unavoidable, he added.

Additionally, Foreign Portfolio Investors (REITs) have been on a selling spree since October 2021, reducing their holdings of investments in many banks and financial sector entities.

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

However, experts believe that India’s banking system should remain unscathed from Credit Suisse’s troubles as it has very little presence in the country.

The banking crisis seen in the United States and Europe has also had a negative impact on the sentiments of Indian investors. Banking stocks in India also corrected, said Alekh Yadav, head of investment products at Sanctum Wealth.

“However, we believe that the Indian banking system is much stronger. The banks are well capitalized, and the rise in rates in India has not been as strong as in the United States and, therefore, the market losses are relatively limited,” he added.

Abhishek Dev, co-founder and CEO of Epsilon Money Mart, said the long-term performance of markets and stocks is ultimately driven by earnings and short-term prices are influenced by news feeds and sentiment. and maybe that’s playing out in banking stocks over the last week or two.

“The Indian banking sector as a whole has strong balance sheets, healthy NIMs (net interest margins) and their bad assets are near a decade low. They may also have negligible, if any, exposure to lenders. regional Americans who have undergone restructuring and are the source of these news flows,” he said. In his view, such short-term volatility can also provide buying opportunities for investors to In the long term, there are many well-managed banking and financial services mutual funds to which one can seek exposure.

FYERS’ Kavalireddi suggested that investors could initiate their investments in banking sector funds through a Systematic Investment Plan (SIP) mode as the current cycle of rising interest rates nears its end. and that a higher but stable interest rate environment is expected from the second half of calendar year 2023.

“Bank stocks are sensitive to macro and microeconomic factors, interest rate cycles, credit and deposit growth rates, among other factors. Therefore, these funds are suitable for investors with sufficient understanding of risk and a longer investment time horizon, to even out the volatility of equity movements and generate sustainable returns,” he added.