Are you over-exposed to Financials?

Saturday, June 10th, 2017

Banks and financial companies have rallied spectacularly over the last one and a half years. In fact now they are the largest component of the BSE Sensex by far. Any correction in financials, could see a very large impact on benchmark and portfolio returns.

If we use the Bank Nifty as a proxy for the financials, we can see the rally this sector has seen since the beginning of 2016




Except for a small drawdown due to demonetisation, the rally has been tremendous. However if you look at the chart, you also see that the technicals are starting to scream that the Bank Nifty is over-bought. The RSI levels have been above 70 for some time now.


Further, financials form over 30 per cent of the index weights as can be seen in the tables below. This is almost three times the weight of the second largest sector!


Financial Sector Weights
Financial Sector Weights


With over a third of the Sensex having exposure to a sector which is signalling that it is overbought, any correction can have large impact on benchmark returns. Similarly, anecdotally looking at 4 and 5 star rated mutual funds on Value Research points to most funds having financial sector weights equal or even much greater weightage to financials compared to the benchmark which could really affect your portfolio returns.

There is no doubt that financials would do well over the long term. However, at this point, there are also many things that negatively affect the sector:

  • Credit growth is very low while deposits are growing faster. This puts a squeeze on bank profitability
  • The banking industry has been grappling with a huge NPA crisis over the last few years
  • Recent farm loan waivers by states could lead to fresh slippages and lead to a whole new crisis
  • Disruptive change due to technology and also regulatory changes to increase the number of participants and hence competition in the sector

And the list could go on…

It would be prudent to review portfolios at this stage to determine how much of an impact a correction in financials would affect your overall returns.

Kindly note that all the information above is for educational and informational purposes only and should not be construed as financial advice. Please consult a qualified financial advisor prior to making any investment decisions.

About the author

Rishad is the founder of Kairos Capital. He started his career with Standard Chartered Wealth Management and has extensive experience in markets, particularly in terms of mutual funds and stocks.

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