Driven by the correction in equity markets, mutual fund's holding of banking stocks was reduced by over Rs 21,600 crore to Rs 1.88 lakh crore in September.
Overall deployment of equity funds in bank stocks stood at Rs 1,88,620 crore at the end of September as compared to Rs 2,10,251 crore in the preceding month, as per data available from the Securities and Exchange Board of India (Sebi).
This was the lowest level of deployment since June, when equity funds' exposure to bank stocks stood at Rs 1.87 lakh crore. In May, it was at Rs 1.89 lakh crore.
In percentage terms, exposure to banking stocks was at 19.78 per cent of equity AUM last month as against 20.21 per cent in August.
"The fall in mutual fund (MF) exposure to banks is more driven by market correction than by any significant reduction by mutual funds. In fact MFs have more or less maintained their exposure in banks compared with six months ago (19.78 per cent in April) adding select banks," said Viday Bala, head of mutual fund research at FundsIndia.com.
"The reduced exposure is more driven by lower market value of their holdings due to the current market correction," she added.
The BSE bankex index slumped by 12 per cent during the period under review, while the benchmark Sensex witnessed a drop of a little over 6 per cent.
Despite the current decline, banking is the most preferred sector with fund mangers as they cannot take a bearish call on banking stocks, given the high weightage attached to the index.
After banks, finance was the second-most preferred sector with fund mangers. Equity fund managers' deployment in finance software stocks was at Rs 87,519 crore, followed by software (Rs 88,453 crore), consumer non-durables (Rs 71,072 crore) and auto (Rs 46,920 crore).
Mutual funds are investment vehicles made up of a pool of funds collected from a large number of investors. They invest in stocks, bonds, money market instruments and similar assets.