It’s a compelling choice if investors stay in for the long haul.

The first very

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banking sector fund, it debuted with a bang. Its return in 2004 put it way ahead of the BSE Bankex and CNX Bank Index. Its performance in 2006 was cause for notice but not for serious concern. Since then, it has more than proved the merit of its theme.

So what went wrong in 2006 that caused it to underperform its only other peer and its benchmark by no small margin? The fundamental reason lay in three stock bets. Reliance Banking stayed away from Axis Bank and HDFC Bank and held a low (relatively speaking) allocation to ICICI Bank. All these stocks, which performed handsomely, were part of UTI Banking Sector’s portfolio and constituted almost 43 per cent of the CNX Bank Index. But the fund stood vindicated when it raced ahead in 2007 and fell the least in 2008.

Fund manager Sunil Singhania is bullish on public sector banks. “Valuations in the Indian banking sector, specifically on the public sector side, are low compared to the returns they make and the profits they generate. They offer great value. When other sectors are trading at 20-25x price to earnings (PE), Indian banks mostly trade at 6-8x PE with price to book (PB) value between 1-1.5x and return on equity (RoE) at more than 15 per cent.”

Despite a high cash allocation way back in July 2004 (64 per cent), Singhania did not use this leeway to a large extent and even during the credit crisis of 2008, he refused to run to cash for cover. Between September 2008 and February 2009, the cash allocation averaged at around 18.51 per cent. Singhania dynamically manages the fund by oscillating between large and mid caps, as well as between private and public sector banks. He also dabbles in derivatives. —Value Research