Why Are Mutual Funds Suddenly Pulling Back from Private Banks?

After reaching a 20-month high in April, mutual fund exposure to private banks has declined for the second month in a row. According to Motilal Oswal Financial Services' latest report, the weightage of private banks in domestic mutual fund portfolios dropped by 50 basis points (bps) to 17.9% in June. Despite this fall, allocation is still 70 bps higher than it was a year ago.

Which Mutual Fund Houses Do This?

Several big fund houses like HDFC AMC, ICICI Prudential, and Axis were underweight on the sector in June. Others like Mirae and Franklin Templeton slightly increased their allocations. PSU banks, meanwhile, saw stable or lower allocations.

Why Did This Happen?

This change is driven by short-term shifts to sectors with better near-term prospects. Last year, private banks faced liquidity issues in the past year due to weak deposit growth. But with rate cuts now in place, liquidity has improved. Thus, this is seen to be a short-term move by fund managers.

Are Private Banks Under Pressure?

As per publicly available information, many AMCs have stated that bank margins may stay low for a couple of quarters. However, this is expected to change gradually as banks improve their credit quality and focus on long-term growth.

Valuations of Private Banks Remain Attractive

Despite some slowdown in profitability, private banks are still seen as strong investments. Many private banks are trading at 1.5x to 2.2x FY26 book value, which is in line with or below long-term averages.

Read more: UTI Asset Management Company Final & Special Dividend of ₹48 Record Date is Tomorrow, July 24, 2025.

Conclusion

While mutual fund exposure to private banks has dipped slightly, experts see it as a short-term trend. The long-term story for private banks remains intact, supported by stable asset quality, strong capital positions, and attractive valuations.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.

 Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.