Banking Mutual Fund: Best Banking MFs to Invest in India 2024 (2024)

One must explore current market trends to guide their investment strategy. When you observe growth in sectors like infrastructure, you may consider investing in specialized mutual funds, such as those focused on power, steel, and cement stocks. Dive deeper into sectoral funds, like banking mutual fund ,which concentrate on specific industries.

If you’re optimistic about the Indian banking sector’s future, investing in banking mutual funds could be a smart move. Now, let’s delve into the specifics of banking mutual funds before making any decisions.

What are Banking Mutual Funds?

Banking funds, often referred to as sectoral banking mutual funds, are a specialized category of equity funds strategically designed to focus on the banking sector. These funds primarily allocate their assets towards equities or equity-related instruments within the banking industry.

Investment Focus

The core objective of banking mutual funds is to provide investors with concentrated exposure to a diversified portfolio of banking securities. This targeted approach allows investors to capitalize on the potential growth and performance of the banking sector.

Equity Emphasis

With a predominant emphasis on equities, banking funds align their investment strategy with the performance and dynamics of banking institutions. This makes them an attractive option for those seeking to participate in the financial success of the banking industry.

Strategic Asset Allocation

The asset allocation of banking mutual funds in India is strategically tailored to align with the dynamics of the banking sector. By predominantly investing in equities and equity-related instruments of banks, these funds aim to maximize returns for investors.

Let us now look at which bank mutual fund is best or best suited for your needs!

Top 10 Banking Sector Mutual Funds

Here is an educational list of the Best Bank Nifty Mutual Funds. This is not meant to be recommendatory and is just a curated list of the best banking mutual funds:

Disclaimer: Please note that the above list is for educational purposes only, and is not recommendatory. Please do your own research or consult your financial advisor before investing.

Overview of the Top Banking Sector Mutual Funds

Here is a brief overview of the bank nifty mutual fund list given above:

Sundaram Financial Services Opportunities Fund

Sundaram Mutual Fund presents the Sundaram Financial Services Opportunities Fund Direct-Growth, a dynamic banking sector mutual fund with a 10-year history, initiated on January 1, 2013. As of September 30, 2023, this fund boasts ₹876 Crores in assets under management (AUM) and holds a medium-sized position in its category. With an expense ratio of 0.88%, it aligns closely with the industry standard for Sectoral-Banking funds. It is one of the best banking sector mutual funds in India on our list!

Over the past year, Sundaram Financial Services Opportunities Fund Direct-Growth has delivered an impressive return of 24.71%. Since its inception, the fund has consistently provided an average annual return of 13.93% and has successfully doubled investors’ money every 4 years.

Nippon India Banking & Financial Services Fund

Introducing Nippon India Banking & Financial Services Fund Direct-Growth, a dynamic Sectoral-Banking mutual fund by Nippon India Mutual Fund, thriving for a decade and ten months since its inception on January 1, 2013. With assets totaling ₹4,588 Crores as of September 30, 2023, this medium-sized fund stands out in its category. It is also one of the best banking and financial services fund on our list!

Boasting a 1.14% expense ratio, slightly higher than its counterparts, Nippon India Banking & Financial Services Fund Direct-Growth has been delivering impressive returns. In the past year alone, it marked a noteworthy 19.14% return, contributing to its overall average annual return of 13.91% since launch. Investors have witnessed their investments double every four years with one of the best bank nifty index fund.

Invesco India Financial Services Fund

Launched on January 1, 2013, Invesco India Financial Services Fund Direct-Growth, a Sectoral-Banking mutual fund by Invesco Mutual Fund, has thrived for a decade. With assets totaling ₹575 Crores as of September 30, 2023, it stands as a medium-sized fund in its category. The expense ratio, at 1.08%, surpasses the average among Sectoral-banking funds. It is one of the mutual funds in financial services on our list, as well!

Over the past year, the fund has yielded an impressive 22.67% return. Since its inception, it has maintained an average annual return of 15.44%. Notably, the fund has doubled investments every 4 years, showcasing its robust performance.

Tata Banking And Financial Services Fund Direct Growth

Launched on December 4, 2015, Tata Banking and Financial Services Fund Direct-Growth, a Sectoral-Banking mutual fund from Tata Mutual Fund, boasts a 7-year 11-month track record. As of September 30, 2023, the fund manages ₹1,672 Crores in assets, positioning it as a medium-sized player in its category. With an expense ratio of 0.54%, Tata Banking and Financial Services Fund Direct-Growth outperforms most other Sectoral-banking funds in terms of cost. It is one of the best bank mutual funds India on our list!

Over the past year, the fund has delivered an impressive return of 18.83%, while its average annual returns since inception stand at 18.09%. Notably, the fund has consistently doubled invested capital every 4 years.

Aditya Birla Sun Life Banking & Financial Services Fund

Aditya Birla Sun Life Banking & Financial Services Fund Direct-Growth, part of Aditya Birla Sun Life Mutual Fund’s Sectoral-Banking portfolio, has been thriving for almost a decade, launched on November 25, 2013. Managing assets worth ₹2,787 Crores as of September 30, 2023, it stands as a medium-sized fund in its category. With a slightly higher expense ratio of 1.06%, compared to peers in the Sectoral-banking segment, the fund maintains its financial stature.

Over the past year, Aditya Birla Sun Life Banking & Financial Services Fund Direct-Growth showcased impressive returns of 17.43%. Since its inception, the fund has consistently delivered an average annual return of 18.21%, doubling the investment every four years. This performance underscores its position as a reliable and rewarding choice in the mutual fund landscape.

ICICI Prudential Banking And Financial Services Fund

Launched on January 1, 2013, the ICICI Prudential Banking and Financial Services Direct Plan-Growth is a Sectoral-Banking mutual fund by ICICI Prudential Mutual Fund. With a decade-long track record, this medium-sized fund holds assets worth ₹6,740 Crores as of September 30, 2023. Boasting a 1.03% expense ratio, slightly higher than its Sectoral-banking counterparts, it remains a robust choice.

Over the past year, the fund yielded a 12.60% return, and since inception, it has consistently delivered an average annual return of 15.37%. Impressively, investors in this fund have seen their money double every four years.

SBI Banking & Financial Services Fund

The SBI Banking & Financial Services Fund Direct-Growth by SBI Mutual Fund, launched on 11th February 2015, is a Sectoral-Banking mutual fund with 8 years and 9 months of track record. As of 30th September 2023, the fund’s assets under management stand at ₹4,245 Crores, making it a medium-sized fund in its category with an expense ratio of 0.78%, comparable to other Sectoral-banking funds.

Over the past year, the fund has yielded a return of 10.66%, and since its inception, it has provided an average annual return of 14.13%. Notably, the fund has demonstrated a doubling of invested capital every 4 years.

UTI Banking And Financial Services Fund

UTI Banking and Financial Services Fund Direct Plan-Growth, a Sectoral-Banking mutual fund by UTI Mutual Fund, has a 10-year history since its launch on January 1, 2013. As of September 30, 2023, it manages assets worth ₹898 Crores, positioning it as a medium-sized fund in its category. With an expense ratio of 1.18%, it exceeds the typical charges of other Sectoral-banking funds.

Over the past year, UTI Banking and Financial Services Fund Direct Plan-Growth has shown a return of 10.12%. Since its inception, it boasts an impressive average annual return of 11.00% and has effectively doubled invested capital every 4 years.

Bandhan Financial Services Fund

Bandhan Mutual Fund presents the Sectoral-Banking mutual fund scheme, Bandhan Financial Services Fund Direct – Growth. Positioned as a medium-sized fund in its category, it boasts a favorable expense ratio of 0.7%, lower than the majority of Sectoral-banking funds.

HDFC Banking & Financial Services Fund

Introducing HDFC Banking & Financial Services Fund Direct – Growth, a dynamic Sectoral-Banking mutual fund by Hdfc Mutual Fund. Launched on 11th June 2021, this fund boasts a 2-year 5-month track record. It manages assets worth ₹2,790 Crores, positioning itself as a medium-sized player in its category. With an expense ratio of just 0.52%, HDFC Banking & Financial Services Fund Direct – Growth outperforms many of its Sectoral-banking counterparts.

Over the past year, the fund has delivered impressive returns of 17.47%, and since inception, it has consistently provided an average annual return of 13.64%. Engage with a fund that not only aligns with your financial goals but surpasses expectations in the competitive mutual fund landscape.

Why Invest in Banking Sector Mutual Funds?

The banking sector is the backbone of any economy, and investing in Banking Sector Mutual Funds can offer a unique set of advantages for astute investors. Here’s why you should consider allocating your funds to this dynamic sector:

Stability and Resilience

Banking sector funds often showcase stability and resilience, mirroring the robust nature of the banking industry. These funds can act as a reliable anchor in your investment portfolio, particularly during market fluctuations.

Capitalizing on Economic Growth

Banking sector funds are well-positioned to capitalize on economic growth. As economies expand, the demand for banking and financial services tends to rise, potentially leading to increased profitability for the sector and, consequently, for the mutual funds invested in it.

Diversification Benefits

Including financial services mutual funds in your investment portfolio provides diversification benefits. These funds typically invest in a variety of financial instruments within the sector, spreading risk and enhancing the overall stability of your investment portfolio.

Profiting from Interest Rate Movements

The performance of banking stocks is often influenced by interest rate movements. Banking sector mutual funds can benefit from rising interest rates, potentially leading to increased returns for investors.

Professional Fund Management

Investing in banking and finance sector mutual funds means entrusting your funds to experienced and professional fund managers. These experts conduct in-depth research and analysis to make informed investment decisions, increasing the likelihood of optimal returns.

Potential for Dividend Income

Many banking sector mutual funds have a track record of distributing dividends. This can be particularly attractive for income-oriented investors seeking a regular income stream along with the potential for capital appreciation.

Who Should Invest in Banking Mutual Funds?

Sectoral banking funds, being sector-specific, inherently pose a heightened concentration risk compared to other mutual fund categories. They appeal to risk-tolerant investors aiming for above-average returns during prosperous times in the banking sector. Ideal for those with an aggressive investment approach, these funds enable investors to leverage the potential of banking stocks for long-term gains. A prolonged investment horizon is essential to mitigate associated risks. By investing in these funds, you gain exposure to a portfolio comprising top-performing banking equities, providing a pathway to potentially superior returns.

Features of Banking Mutual Funds India

Here are a few key features of Banking Financial Services Sector Mutual Funds:

1. Specialized Subset: Banking mutual funds form a distinct category within the broader mutual funds industry in India, focusing specifically on investments in the banking sector.
2. Professional Management: Each banking mutual fund is professionally managed by an Asset Management Company (AMC), which strategically allocates the fund’s corpus to various securities within the banking industry and bank financial services.
3. Investment Pool Dynamics: As with other mutual funds, financial mutual funds operate by pooling contributions from multiple investors. These contributions are received periodically—weekly, fortnightly, or monthly—creating a diverse pool of resources.
4. Maturity Date and Earnings Distribution: Every banking mutual fund has a predetermined maturity date. Beyond this date, the fund distributes its earnings among its contributors after accounting for the fees charged by the Asset Manager.
5. Strategic Investment Approach: Unlike random allocation, AMCs carefully select the best-performing companies within the banking sector for fund investments. This strategic approach aims to optimize returns for investors.

6. Diversified Portfolio: Banking mutual funds offer diversification by investing in a range of banking entities, providing investors exposure to various facets of the banking industry, such as retail banking, investment banking, and more.
7. Favorable Banking Sector Trends: Given the recent trend, AMCs increasingly favor the Indian banking sector as a prime investment avenue. This reflects the sector’s attractiveness and potential for robust returns.

Factors to Consider Before Investing in Banking Mutual Funds

Before venturing into sectoral banking funds, take note of the following factors:

• Risk Dynamics: Sectoral banking funds come with heightened risk levels, given their exclusive investment focus on a particular sector. These funds flourish when the banking sector performs well, making them particularly suitable for more daring investors.
• Time Commitment: Due to the increased risk associated with concentration in these funds, a longer investment horizon is essential. Staying invested for at least five years significantly reduces risks. Ensure your investment aligns with this timeframe for optimal outcomes.

How to Invest in Banking Sector Mutual Funds?

Here’s a comprehensive guide on how to make the most of your investment journey:

Thorough Research

Before committing your funds, conduct thorough research on various Banking Sector Mutual Funds available in the market. Analyze their performance history, fund manager expertise, and the overall health of the banking sector. This groundwork ensures an informed investment decision.

Diversification Strategy

Opt for a diversified portfolio within the banking sector. Spread your investments across different types of banking instruments to mitigate risks associated with a specific area of focus. Diversification is a powerful tool for long-term stability.

Stay Informed on Market Trends

Keep a vigilant eye on market trends and updates related to the banking sector. Changes in economic conditions, regulatory frameworks, and technological advancements can significantly impact banking mutual funds. Staying informed empowers you to make timely adjustments to your investment strategy.

Evaluate Risk Tolerance

Assess your risk tolerance before entering the banking mutual fund arena. These funds can exhibit volatility, especially in response to sector-specific events. Align your risk tolerance with the inherent unpredictability of the banking sector for a well-balanced investment approach.

How to Choose Good Banking Sector Mutual Funds?

Selecting the right banking sector mutual fund is a critical step in optimizing your investment portfolio. Here are key considerations to guide your decision-making process:

• Performance History: Begin by assessing the fund’s historical performance. Analyze its track record over different market conditions to gauge its resilience and consistency. Look for funds that have demonstrated stability and growth over time.
• Fund Manager Expertise: The expertise of the fund manager plays a pivotal role in the fund’s success. Research the manager’s track record, experience in the banking sector, and their ability to navigate market fluctuations. A seasoned fund manager can contribute significantly to the fund’s performance.
• Expense Ratio: Keep an eye on the fund’s expense ratio, which reflects the costs associated with managing the fund. Lower expense ratios are generally favorable, as they can enhance your overall returns. Compare the expense ratios of different mutual funds in banking sector to make an informed decision.
• Fund Size and Liquidity: Consider the size of the mutual fund and its liquidity. Larger funds may offer more stability, while liquidity ensures that you can easily buy or sell shares without impacting the fund’s value. Adequate size and liquidity contribute to a smoother investment experience.

How Are Returns Calculated on Banking Sector Mutual Funds?

Understanding the methodology behind calculating returns is crucial when delving into the realm of Banking Sector Mutual Funds. The process offers insights into the fund’s performance and aids investors in making informed decisions. Here’s a breakdown of how returns are determined on Banking Sector Mutual Funds:

• Net Asset Value (NAV): Returns on mutual funds, including those focused on the banking sector, are intricately linked to the Net Asset Value. NAV represents the market value of the fund’s assets minus liabilities. The calculation involves dividing this value by the total number of outstanding units, providing a per-unit value. Changes in NAV over time reflect the fund’s performance and directly impact returns.
• Dividend Distributions: Some banking sector mutual funds distribute dividends to unit-holders. Returns from these funds include both capital appreciation and dividends received. Investors need to factor in these distributions when evaluating the overall return on their investment.
• Total Return Index (TRI): To gauge the holistic performance of banking sector mutual funds, considering the Total Return Index is imperative. Unlike traditional indices, TRI accounts for both capital gains and income generated by the fund. This comprehensive measure provides a more accurate representation of the fund’s returns.

Taxability on Banking Sector Mutual Funds

Banking funds undergo taxation akin to other equity investments. Upon redeeming mutual fund units, gains are taxed based on the holding period.

• Short-term capital gains, realized within 12 months, incur a fixed 15% tax, irrespective of the tax slab.
• Long-term capital gains from selling units after 12 months are taxed at a flat rate of 10%, without indexation benefits.

Challenges of Investing in Banking Mutual Funds

Investing in banking mutual funds presents its own set of challenges that investors need to be mindful of. Understanding these hurdles is crucial for making informed investment decisions.

Market Sensitivity

Banking mutual funds are particularly sensitive to market fluctuations. The financial sector is heavily influenced by economic conditions, interest rates, and regulatory changes. Investors should be prepared for the impact of these external factors on the performance of banking funds.

Risk of Non-Performing Assets (NPAs)

The banking sector is susceptible to the risk of non-performing assets, which can negatively affect the performance of banking mutual funds. Investors should closely monitor the quality of assets held by the funds and stay informed about the overall health of the banking industry.

Interest Rate Volatility: Banking mutual funds are highly responsive to interest rate movements. Fluctuations in interest rates can impact the profitability of banks, subsequently affecting the performance of banking funds. Investors should be aware of the interest rate environment and its potential impact on their investment.

• Regulatory Changes: The financial sector is subject to frequent regulatory changes, which can significantly impact the operations and profitability of banks. Investors in banking mutual funds should stay abreast of regulatory developments and assess how these changes may affect their investment strategy.
• Diversification Challenges: While banking mutual funds focus on the financial sector, they may lack diversification compared to broader market funds. Over-reliance on a specific industry can expose investors to sector-specific risks. It is essential for investors to balance their portfolios to mitigate concentration risk.

Benefits of Investing in Banking Mutual Funds

Here are the few benefits of investing in Banking Mutual Funds:

• Historical Record: As per an analysis published in The Economic Times in 2017, the mutual fund banking sector performed 38 % over one year, 21% in 3 years and 15.30 % over the previous 5 years. If you look at the performance of this sector in the short term ( 3 month period), then also you get a figure of 15% which is very good. Implication- Returns from the banking sector are indeed very good irrespective of your investment window.
• Protection: The Indian banking sector is subjected to several checks and balances. The RBI and the government have put down several stringent conditions while opening bank, expanding it and shutting it down. As such, depositors and other lenders need not to worry about the volatility in this sector.
• Stability: The Indian banking sector is also quite stable and is not subject to risks and shocks that are so much prevalent in other sectors like IT, oil and gas, and automobile. Therefore, investing in this sector is indeed beneficial.

To Wrap It Up…

In recent years, mutual funds concentrating on the banking sector have excelled. Factors like heightened bank penetration, diminished NPAs, and streamlined mergers contribute to this success. Optimizing NPA ratios and expanding digital transactions can propel this sector even more, with the potential for enhanced performance.

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