PSU banks under pressure: Should you invest in PSU bank ETFs now?
Public sector banks have been suffering due to rising non-performing assets. Over the last three years, the Nifty PSU Bank Index has fallen at a compounded annual rate of 4.92%.
If you have been tracking financial news, you must be aware of the alleged LoU (Letter of Undertaking) scam in Punjab National Bank and the resultant free fall in the share prices of leading public sector banks.
The Nifty PSU bank index has lost 15.73 percent over the past month. Understandably, many retail investors are worried about this steep fall. But for some savvy investors, this fall presents an investment opportunity.
“The PSU banks have got their lessons. Most of the large losses are out and the prices at which the PSU banks are quoting makes them good investment candidate,” says Feroze Azeez, deputy CEO of Anand Rathi Private Wealth Management.
Public sector banks have been suffering due to rising non-performing assets for some time now. Over the last three years, the Nifty PSU Bank Index has fallen at a compounded annual rate of 4.92 percent and space has been seen as a value destroyer.
But there are investors who are willing to take contrarian bets on PSU banks' futures.
“NPA resolution over next three months in NCLT should start the process of improvement for PSU banks. The banks are expected to go through a long process of transformation as efficiencies kick in. Potential credit growth’s biggest beneficiaries will be PSU banks,” said Abhishek Jain, head of institutional business -sales at Almondz Global Securities. He expects valuations to improve as banks start reporting better performance.
Individual investors may find it difficult to pick stocks that are better placed in the PSU banking space. Instead, it makes more sense to take the portfolio approach by investing in a basket of PSU bank stocks. The Nifty PSU Bank Index is a basket of stocks comprising 12 PSU bank stocks. The largest stock – State Bank of India - carried a 64.92 percent weight on the index as on January 31.
You need not buy the stock index yourself. Two mutual fund schemes that mimic this index and invest in these exchange-traded funds can help you invest.
As the schemes are passively managed, they are expected to deliver returns closer to that delivered by the index. The idea is to get an exposure to the basket of PSU banks that may outperform over medium to long term. Actively managed equity funds are underweight on PSU banks.
“The volatility in stock markets must be used to your advantage. Over next three months you should accumulate stocks of PSU banks,” advised Abhishek Jain. "Do not expect a V-shaped recovery and quick buck here."
“As the investors will be rewarded over next three to four years, you may also consider investing in one go,” said Feroze Azeez.
Although the opportunity looks good, investors must be well aware of the concentration risk they are taking. Here you are taking a contrarian bet and if it goes right you will be rewarded by more than the market return. However, if the underlying expectations do not materialize, these investments may not offer any material upside.
You should not put a large chunk of your investments in these schemes. These investments at the most can be a tactical allocation in addition to your core portfolio holdings.
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