Banking sector mutual funds gained an average 15.8 percent during the month, outperforming the 9.3 percent rise in India's benchmark 30-share index, data from global fund tracker Lipper, a Thomson Reuters company, showed.
"If you are betting that the Indian economy will do well despite the global meltdown... this is the sector which will obviously outperform," J. Venkatesan, a fund manager at Sundaram BNP Paribas Asset Management, said.
"Valuation comfort is much more better here than any other sector," Venkatesan added.
He said most state-run banks were available at a reasonable 1.5 times their price to book value, while returns on equity were about 18 percent and improving.
Indian firms will start releasing their quarterly results from the second week of October, and advance tax payments indicate robust profits.
That should ease pressure on likely bad loans for banking firms and also boost prospects for credit off-take as corporates return to health and revive expansion plans.
Top lender State Bank of India climbed little over a quarter in September to 2,195.70, its highest close since February last year, as investors expected strong corporate earnings to boost the bank's profits and ease bad debt worries.