The financial sector has always commanded a large share of attention from mutual fund managers and long term investors. By the end of May this year, mutual fund holdings in the financial space stood at a massive 13.78 lakh crore rupees, according to data from the Prime MF Database. However, within this wide basket, private sector banks are beginning to look less appealing compared to other players like NBFCs, public sector banks, and capital market linked financial companies.
Several industry voices now suggest that private lenders are being weighed down by a combination of valuation concerns and underwhelming growth signals. Alok Agarwal, head of quant and fund manager at Alchemy Capital, pointed out that the banking sector is currently heavily owned by mutual funds and institutional investors. This high level of ownership could limit the room for significant upside, especially if performance metrics do not show improvement.
According to Agarwal, key drivers such as credit growth, profit margins, and credit cost efficiency are not offering strong reasons to remain bullish on private sector banks at the moment. He noted that while deposit growth could bring in some optimism for these banks, other financial stocks currently appear better positioned. He singled out NBFCs and capital market oriented firms as more attractive investment options for the near term.
Manish Goel, the founder and director of Equentis Wealth Advisory, also echoed this sentiment. He stressed that a well diversified portfolio still requires a substantial exposure to the BFSI sector, typically around 30 to 35 percent, to align with India's overall economic growth trajectory. However, within this sector, his firm has placed more confidence in wealth management companies and NBFCs. He explained that the surge in liquidity and strong regulatory oversight from the RBI is creating a solid foundation for NBFCs to thrive.
Goel also pointed to the valuation gap and maturity level as reasons why public sector banks may outperform their private counterparts. While a few private banks still present strong stories individually, the sector as a whole is not delivering the kind of growth narrative that excites investors at a basket level.
Some experts believe that the current underperformance of private banks might also be cyclical. A report by Ashika Institutional Equities stated that the first quarter of FY26 is likely to be a transitional period due to monetary easing. However, the report also highlighted that the groundwork for a stronger recovery is already in place. With improving liquidity, a rebound in rural demand, and supportive policy measures, the second half of FY26 could deliver better earnings for both banks and NBFCs.
Agarwal added that the ongoing decline in interest rates could prove especially beneficial for NBFCs, given their lending model. He believes that sectors like banking, FMCG, and IT, which led market performance over the past decade, are currently showing signs of earnings slowdown. Since these sectors also hold significant weight in benchmark indices, this underperformance is impacting overall market sentiment.
Investors now find themselves at an interesting crossroads. While the financial sector continues to offer long term potential, the leaders within it are undergoing a shuffle. Public sector banks, wealth management firms, and NBFCs are emerging as front runners, while private sector banks may need stronger signals to regain investor confidence.
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