Mutual funds raised their investment in private sector banks during June, pushing the sector's total portfolio weight to 17.9%. This shift reflects growing confidence among fund managers in loan growth and stable outlooks for large private lenders, despite broader market volatility.
Detailed Coverage
Indian mutual funds have increased their exposure to private sector banks, lifting the sector's total weight in their portfolios to 17.9% in June. This represents a 60 basis point rise compared to the previous month, signaling a return of institutional interest after a period of reduced allocation that saw the sector weight dip to 17.3% by April 2026.
Strategic Inflows into Major Lenders
The increased allocation was driven by concentrated buying in several large-cap lenders. Mutual fund portfolios grew by over 31.8 million shares of HDFC Bank and 6.35 million shares of ICICI Bank during the month. While the total value of mutual fund holdings in Axis Bank increased, this was primarily attributed to stock price appreciation, as the actual number of shares held by fund houses declined slightly during the same period.
Factors Driving Institutional Sentiment
The renewed interest from fund managers is supported by data suggesting that credit growth has reached a four-year high, with corporate lending expanding at a double-digit pace. Improvements in deposit growth are also being monitored by the industry, with liquidity measures such as the RBI’s FCNR(B) swap facility—which has gathered approximately $17 billion—providing a degree of stability to banking system liquidity. Analysts suggest that concerns that previously hampered the sector are appearing to subside, allowing the focus to shift back to core credit expansion.
Valuation and Margin Outlook
Private banks have faced a period of relative underperformance over the last five years, which has resulted in what many fund managers consider to be more attractive entry points. With credit demand remaining strong, expectations are building that net interest margins, which measure the difference between interest earned on loans and interest paid on deposits, may have bottomed out. If margins stabilize or improve in the coming quarters, it could provide a boost to the sector's profitability. Asset quality across the major private lenders remains stable, providing a buffer against external macro uncertainties such as global geopolitical risks.
Divergence from PSU Banks
While private banks have seen increased inflows, public sector banks (PSU banks) continue to remain under-owned in mutual fund portfolios. Although the Nifty PSU Bank index has recorded gains, fund managers remain cautious, noting that the metrics for these lenders may already be near their peak levels. The primary monitorable for investors going forward will be the sustainability of deposit growth across the private banking space, as this will determine the ability of these lenders to maintain their current pace of loan expansion without placing excessive pressure on their profit margins.