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The performance of banking and information technology (IT) stocks has had a significant impact on the composition of diversified mutual fund (MF) portfolios.
Over the past two months, these sectors have become increasingly dominant, now constituting nearly 30 per cent of the total allocation in many diversified MF portfolios.
This shift reflects the strong performance and new investments flowing into these sectors.
Compared to a 6.5 per cent fall in Nifty 50 in October-November period, the Nifty IT index rose 2.9 per cent, while the Nifty Bank index declined 1.7 per cent.
Correspondingly, stocks such as Axis Bank, ICICI Bank, State Bank of India and TCS have been among the top picks for mutual funds.
In their year-end outlooks, most fund houses and brokerages have shared a positive view on the two sectors.
While they see valuation comfort in bank stocks, the bullish stance on IT stocks is driven by expectations of a recovery.
“Even as growth rates are converging for Nifty (broader market) and banks, the valuations have moved in an opposite direction.
“Banks price-to-earnings ratio (PE) is below the 10-year average at 15x.
“Banks discount to Nifty 50 at 35 per cent is about 3x average of the 12 per cent discount.
“We continue to prefer private banks over PSU banks due to the decadal low valuation gap and superior profitability. Valuation is attractive for the banking sector across market capitalisation,” said Tata Mutual Fund.
Banking sector stocks saw their weight surge from 15.7 per cent to 16.5 per cent during the two-month period, according to a Nuvama Alternative & Quantitative Research report based on the investing pattern of key equity schemes of top 11 fund houses.
In the case of IT, the average exposure rose from 11 per cent to 12 per cent.
The outperformance of IT stocks in recent months has been driven by positive commentaries from US companies, along with the expectation of rate cuts in the US.
Fund houses also see the domestic companies gaining from the growing IT spends on emerging technologies.
“India’s IT services sector is set to experience a sustained growth trajectory, driven by increasing investments in emerging technologies such as Artificial Intelligence (AI), blockchain, and cybersecurity.
“Cloud services are expected to see continued demand, positioning India as a significant global player in the technology ecosystem.
“The rise of generative AI is expected to be a major growth driver, with demand projected to grow 15-fold between 2022 and 2027, presenting a significant opportunity for Indian tech companies,” ITI Mutual Fund said.
The increase in banking and IT sector allocation has come at the expense of sectors such as consumer, capital goods, NBFCs, automobile and oil and gas.
Pharmaceuticals is the other major sector to see an increase in allocation.
“IT, which has already recovered from its lows after rate cuts, may do well in 2025 as discretionary spending picks up, provided Trump does not impose any surprise tariffs.
“Banks may also witness recovery post interest rate cuts resulting in possible pick up in credit growth.
“Moreover, the recent CRR cut by 50 bps (in two tranches) should boost liquidity and credit growth in the banking sector,” said Deepak Ramaraju, senior fund manager, Shriram AMC.
Experts say the market may continue to remain under pressure in coming months amid global uncertainties and the slowdown in the domestic economy, making the sectoral and stock selections more crucial for fund managers in 2025.
