Sectoral funds, focused exclusively on public sector banks (PSBs), have delivered the strongest returns among domestic mutual fund (MF) categories over the past six months.

Illustration: Dominic Xavier/Rediff

However, active banking funds have significantly lagged because of their heavy tilt towards private lenders.

During the past six months, median returns of active banking and financial services funds are at 9.2 per cent.

This compares to a nearly 28 per cent rise in Nifty PSU Bank index, shows data from Value Research.

Most active banking and financial services (BFSI) funds have a large chunk of their investments (over 50 per cent) in the top 4-5 private sector lenders.

This is because of their higher share in the banking sector profit pool, and more importantly high weights in their benchmarks.

HDFC Bank, ICICI Bank, Axis Bank and Kotak Mahindra Bank alone have 66 per cent weight in Nifty Financial Services index.

State Bank of India (SBI) is the only PSB with over 5 per cent weight in the index.

While active funds have the flexibility to build their portfolios independently, they still keep the benchmark in mind because their performance is measured against it.

Most direct plans of BFSI schemes have outperformed the index in the six-month period.

The Nifty Financial Services total return index is up 7.17 per cent in 6 months.

According to experts, the diversified nature of such schemes is also a factor behind their large performance gap with PSB indices.

“Active BFSI funds typically spread their allocation across private and public sector banks, non-banking financial companies (NBFCs), housing finance companies, insurance, and brokerage firms.

“As a result, even though the PSU banking segment delivered strong returns, the impact on BFSI fund performance remained limited,” said Feroze Azeez, joint chief executive officer (CEO), Anand Rathi Wealth.

They also expect the wide near-term performance difference between PSU and private-sector banks to narrow, going forward.

“Private banks are positioned for a resurgence and may outperform in the medium term.

“This comes as sector fundamentals evolve and margin pressures on PSU banks increase by 2026,” said Vipul Bhowar, senior director, head of equities, Waterfield Advisors.

“Furthermore, private banks demonstrate superior deposit franchises, prudent asset quality, and operational efficiencies from technology adoption, positioning them to capitalise on upcoming growth opportunities,” he added.

Om Ghawalkar, market analyst at Share.

Market said while the private bank outlook is improving, the rally in PSU banks seems to have run its course.

”While PSU banks capitalised on asset quality fixes and government reforms to deliver a 30 per cent surge in 2025, a sector rotation is probable in 2026.

“The Nifty PSU Bank index appears overextended after its multi-year rally, raising the risk of pullbacks,” he said.