Banks have traditionally been the most preferred sector for fund managers. Equity mutual funds having the highest ever holdings of Rs 2.6 lakh crore in banking stocks as of March 2019 affirm their love for the sector. As per the latest data available from the Securities and Exchange Board of India (Sebi), overall deployment of equity funds in bank stocks grew around 52 per cent year-on-year (y-o-y) in the month compared to 29.1 per cent y-o-y in the previous month. With this, equity mutual funds' exposure to banking stocks climbed to an all-time high of 23.8 per cent in March compared to 22.87 per cent in the previous month.

The rally in banking stocks in 2019 led to an increased exposure of this space by mutual funds. The BSE Bankex outperformed the benchmark Sensex by around five percentage points in the last quarter of fiscal 2018/19. The Bankex index grew 11.5 per cent compared to a single digit growth of 6.7 per cent in the 30-scrip index, over the same period. "Mutual funds selectively added to their banking exposure in the 2018 correction. They took exposure to stocks that were seeing a gradual turnaround in their performance and were available at low valuations, especially those in the corporate banking space. The swift rally in banking space, thanks to heightened buying by FPIs, ensured a sharp rally and swelling of bank exposure for MFs," says Vidya Bala, head of mutual fund research, FundsIndia.

After banks, finance and software were the next preferred sectors with a share of 9.42 per cent and 8.63 per cent and their assets under management (AUM) stood at Rs 1.03 lakh crore and Rs 94,703 crore at the end of March 2019.

The momentum took the AUMs of equity funds to never seen levels of 10.97 lakh crore in the month. It registered a five-month high y-o-y growth of 23.8 per cent. March witnessed a sharp increase in AUMs of equity funds by around 14 percentage points, from 10.23 per cent in February. Average increase in AUMs over the past six months was 13.28 per cent. The benchmark Sensex witnessed a three -year high monthly returns of 7.8 per cent in March 2019. This momentum was, however, short-lived with a skimpy return of 0.93 per cent in the following month.

The current phase provides an opportunity for funds to invest in this space with quality stocks. "Banks (YES Bank is an example) are now more willing to write off large chunks and clean up the table. FY20 will see more banks clearing their baggage and will begin to focus on growth. While there could be near-term shocks (ICICI Bank's Q4 results for example) we think, the current phase would provide an opportunity for funds to invest in quality banking stocks," adds Bala.

Business and assets that NBFCs lost in the present liquidity crisis could move to select banks contributing to their growth in the current fiscal.