anking Mutual Funds are funds that invest money in the stocks and bonds of banks or other financial institutions. The banking sector (Banks and Financial Institutions) in India is on a growth trajectory. In the past 10 years, we have seen robust growth in banking. So, it makes sense to invest in the banking sector. One of the best ways to invest money in the banking sector is via banking mutual funds. What are Banking Mutual Funds? Which are the Top Banking Mutual Funds in India? how can you make the most of them? Let’s take a look at banking mutual funds in detail.
What are Banking Mutual Funds?
Banking Mutual Funds are one type of sectorial mutual funds. They represent the banking sector. These types of mutual funds invest large sums of money in bank-related assets such as bank equity, bonds, short-term money market instruments, and other securities. The investment includes stocks of banks, non-banking financial companies (NBFCs), insurance companies, and other financial institutions. The idea is to invest capital in the finance sector, which plays a crucial role in the economy’s growth. As these types of funds invest in one sector, it does not offer any diversification and categories as high-risk mutual funds.
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Why Invest in Banking Mutual Funds?
There are many reasons why investors should consider banking mutual funds. A few of them are given below.
Economic Growth
Banking Mutual funds are the growth engine of the economy. As the economy grows, the demand for banking, lending, and other financial activity increases. This leads to growth and profit related to the banking sector. So, it makes sense to capitalize on economic growth by investing in banking mutual funds.
Stability
Banks and financial institutions tend to be more stable compared to other sectors, making these funds less volatile. Banking funds can serve as a steady foundation in your investment portfolio, especially in times of market volatility. The banking sector is controlled by the rules of RBI. This further enhances this stability by ensuring ethical practices and financial stability.
Diversification
Banking mutual funds although invested in the single banking sector, these funds offer diversification within the financial sector, spreading risk across various companies.
Interest Rate Movement Benefits
Interest rate movements impact the performance of bank stocks. Mutual funds in the banking industry may experience positive impacts from increasing interest rates, possibly resulting in higher profits for investors.
Top Banking Mutual Funds in India
#1 Invesco India Financial Service Fund
Invesco India Financial Service Fund is one of the best banking mutual funds. Invesco India Financial Service Fund has generated 20% returns in the last 3 years. In the last year, this fund generated a return of 37.3%. It is a four-star rated fund with a low expense ratio of 0.93%. You can invest in this fund via the SIP route.
#2 SBI Banking and Financial Service Fund – Growth
SBI Banking and Financial Service Fund is another top banking mutual fund. SBI Banking and Financial Service Fund generated 29% returns for the investors in the past 1 year and 16% returns in the past 3 years. The major investment of this fund is in the private sector banks. The expense ratio of this fund is slightly high.
#3 Nippon India Banking and Financial Service Fund – Growth
Nippon India Banking and Financial Service Fund is one of the best banking funds for investment. This fund has generated 23.5% returns for the investors in the past 1 year. In the last 3 years, this fund generated 18.6% returns. The fund size AUM of this fund is considerably high.
#4 Sundaram Financial Service Opportunities Fund
Sundaram Financial Service Opportunities Fund is a high-risk banking mutual fund for investment. This fund generated 28.75% returns for the investors in the last 1 year. In the last 3 years, this fund generated 20.27% returns. The expense ratio of this fund is very high.
#5 Tata Banking and Financial Service Fund
Tata Banking and Financial Service Fund is a very good fund for investment in the banking sector. This fund generated 18.7% returns for the investors in the last 1 year. In the last 3 years, this fund generated 15.57% returns. It is a high risk fund.
How to Choose the Right Banking Mutual Fund
Choosing the right banking mutual fund can be a daunting task. Here are some tips to help you make an informed decision:
Assess Your Risk Appetite
Banking Mutual funds are sectorial funds and risky from an investment viewpoint. Consider how much risk you are willing to take. Pure banking funds tend to be more volatile, while the financial sector and hybrid funds offer a bit more stability.
Look at Past Performance
While past performance is not a guarantee of future results, it can give you an idea of how the fund has performed over time. You should look at the funds that are consistently giving higher returns.
Check the Fund Manager’s Track Record
The fund’s performance is significantly impacted by the fund manager’s knowledge and skills. Look for funds managed by experienced professionals with a good track record.
Expense Ratio
The expense ratio is the annual fee charged by the fund. Lower expense ratios can lead to higher net returns. You should compare the expense ratios of different banking sector funds before making an investment decision.
Fund Size and Liquidity
You should consider mutual fund size and liquidity. A larger fund offers more stability. Higher liquidity allows you to buy or sell funds without any difficulty.
Who Should Invest in Banking Mutual Funds?
Banking Mutual Funds are more suitable for High risk (aggressive) investors. Conservative investors should stay away from these types of funds. Since these funds invest primarily in one sector, they are more susceptible to sector-specific risks. Any change in the regulations can impact the performance of the banking sector. Like all equity investments, banking mutual funds are subject to market volatility.
So investors with low risk appetite should stay away from banking sector funds. Investors with high-risk appetite, long-term goals, a strong desire to invest in banking sector equity, and comfortable with sector dynamics can invest in these types of funds.
Tax on Banking Mutual Funds
Mutual Funds are subject to a long-term capital gain tax or a short-term capital gain tax based on the holding period.
Long-Term Capital Gain Tax – If the mutual funds holding period is more than 12 months, long-term capital gain tax is applicable. As per budget -2024, the gains arising from selling an equity mutual fund after 12 months is 12.5% without indexation benefits. For long-term capital gain tax 1.25 lakh per year is given as an exemption.
Short-Term Capital Gain Tax – If the mutual funds holding period is less than 1 year, short-term capital gain tax is applicable. Short-term gain tax from selling an equity mutual fund before 12 months is 20%.
FAQ
Are banking mutual funds suitable for beginners?
No, these funds are not suitable for beginners. It falls under the high-risk category so it is essential to understand the risks involved before investing.
How long should I stay invested in a banking mutual fund?
It is usually advised to have a medium to long-term investment horizon (3-5 years) in order to endure market fluctuations and attain favorable returns.
Can I invest in the banking mutual funds through a SIP?
Yes, you can invest in banking mutual funds with a Systematic Investment Plan (SIP), enabling you to invest a consistent amount periodically, minimizing the influence of market fluctuations.
What are the tax implications of investing in banking mutual funds?
Banking mutual funds are subject to capital gain tax. Any gains made from these mutual funds held less than a year fall under short-term capital gains and are taxed at 20%. If funds are held more than a year gains are classified as long-term capital gain tax. It is taxed at 12.5%. However, you can get an exemption of up to 1.25 Lakh in long-term capital gain tax per year.
Conclusion
Banking mutual funds in India offer a unique opportunity for investors to tap into the growth and stability of the financial sector. You can make well-informed investment decisions by looking at the available fund types, evaluating your risk tolerance, and taking into account factors such as historical performance and expense ratios. Even though these funds have risks, their potential for high returns and stability makes them appealing to many investors.