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Sunday, Mar 19, 2006

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UTI Banking Sector Fund: Buy

Suresh Krishnamurthy

UTI Banking Sector Fund is invested largely in old private sector bank stocks and has a more balanced portfolio than its peers in the same sector.

Investors seeking exposure to banking sector stocks can consider investing in the UTI Banking Sector fund. Investors already invested in Reliance Banking Fund can also take exposures to diversify their holdings.

Investments in the banking sector appear attractive now. Credit growth has risen sharply this year. Chances are that this growth will be sustained in the next fiscal as well. The prospect for significant volume growth is a positive for this sector given the declining margins.

Volume growth can offset margin declines and enable modest growth in profits. As the valuation levels of most public and private sector bank stocks are attractive, even modest growth in profits can lead to capital appreciation.

Long-term outlook: The long-term prospects for the banking sector are also attractive. The outlook for increased penetration of banking services appears bright. Increase in the use of technology, liberalised legislative framework and prospects for consolidation also suggest that returns over a longer term could prove attractive. UTI Banking Sector Fund has delivered returns that are lower than that of the banking indices over the past 12 months. This is mainly because banking sector funds are underweight on the top three stocks — SBI, ICICI and HDFC. That is, they have invested a lower proportion in these three stocks. Such an underweight position is justified over the long term, considering there are more attractive investment options among the universe of banking stocks. In the short term, however, this could lead to a period of under-performance against the index.

Reliance v UTI funds: Compared to Reliance Banking Fund, UTI's fund has been fully invested most of the time. UTI Banking Sector has also invested more in old private sector bank stocks. At the same time, Reliance Banking has invested about 5 per cent in non-banking finance company stocks. UTI Banking has no such investment.

Reliance Banking has invested under-valued stocks such as Oriental Bank of Commerce, Dena Bank, Bank of Baroda, Bank of Maharashtra, South Indian Bank and Corporation Bank, which form 27 per cent of net assets.

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