The weightage of private banks in mutual fund schemes was up by 110 basis points (bps) from 16.2% in July to 17.3% in August. However, the weightage is still 280bps lower compared to 20.1% in the year-ago, according to data from Association of Mutual Funds in India (Amfi) and NAV India, and analyzed by Motilal Oswal Financial Services Ltd.

Technology (10.2%), oil and gas (9.1%) and consumer (8.8%) made up for the other top sector holding for mutual funds in August. But, the weightage for oil and gas slipped by 60bps from July to a 3-month low of 9.1% after rising for two straight months. The consumer sector’s weight fell for the third consecutive month to 8.8%, down 40bps from July.

The increase in exposure to private banks by mutual funds may have contributed to the rally in the sector in August, when the Nifty Bank and Nifty Private Bank indices rallied nearly 10%, each, while Nifty PSU Bank jumped 8.06% outpacing the benchmark Nifty which was up around 3%.

Private banks were on a fundraising spree with ICICI Bank Ltd, Axis Bank Ltd and HDFC Ltd raising around ₹35,000 crore in August.

However, due to a lack of clarity around the non-performing loan (NPL) cycle and growth outlook, large private banks have been underperforming the benchmark since March.

“Delay in NPL recognition is a key investor concern. We agree that visibility on potential NPL additions is low, but clarity should emerge in second half of FY21 given that moratorium has ended and restructuring timelines are limited. Further, large private banks have fortified balance sheets after recent capital raisings. Capital ratios are now some of the best among global banks," said Morgan Stanley in a report.

As factors around weak competition, improving funding franchises and strong digital capabilities are expected to help, analysts at the global firm have built in 10-15% loan CAGRs at large private banks over the next three years.

Others concurred. “Capital raising has led to stronger bank balance sheets. Liquidity and solvency risk for banks have eased, although concerns around growth and asset quality persist," said Edelweiss Securities Ltd.

In terms of month-on-month value increase, seven of the top-10 stocks bought by MFs in August were ICICI Bank, Axis Bank, HDFC Bank, SBI, HDFC, Bandhan Bank and Bajaj Finance. Stocks that saw maximum decline in month-on-month value were Bharti Airtel, HUL, Infosys, Aurobindo Pharma, UltraTech Cement, Reliance Industries, HDFC Life Insurance, SBI Life Insurance.