BANKING MUTUAL FUNDS
Banking mutual funds are equity mutual funds that focus and structure their portfolio with equity linked and equity securities of Indian Banks. These are funds whose asset allocation is made predominantly towards the Indian banks and financial institutions. These funds are expected to perform well and beat the set benchmark when the banking sector of the nation is booming. By investing in these mutual funds, investors can gain exposure to a well constituted portfolio of banking and financial securities.
MERITS OF INVESTING IN BANKING MUTUAL FUNDS
The following are the major advantages investors have while investing in these funds:
1. Diversified exposure:
Investors get exposure to a well managed portfolio which includes top performing securities of Indian financial institutions and banks. This adds to the diversification of the portfolio and also assures that the fund is professionally managed and supervised.
2. Better returns:
Investors get an opportunity and potential to earn returns which are above the set bar and can beat the benchmarks pretty easily. These mutual funds invest after doing vast research and constitute securities who have the potential to outperform the market.
3. Investment pan market cap:
It is focused on one specific sector but not one capitalization. It invests predominantly in banking based shares but entities of all sizes varying from small and mid cap to large cap. It depends on different AMCs and schemes if they would invest a major chunk of the corpus in any one market cap or go forward with diversifying throughout.
Banking funds as any sectoral fund is focused particularly on one sector. All sectors go through market volatilities and cycles and perform accordingly, and when a particular sector is booming, funds that focus on growth sectors give maximum returns and grow beyond the margin from the benchmark and other funds. The Banking and financial sector has given consistent returns over a long period now.
THINGS TO CONSIDER BEFORE INVESTING IN BANKING FUNDS
1. Involved Costs:
There are different costs involved in funds such as entry and exit load , expense ratio etc. Investors must review these costs before going forward with investments.
2. Financial Goals:
Setting up a goal before investing is the foremost and most important decision to make. It is very significant to evaluate that the fund objective is aligned to the financial goals. If investors can analyse the banking sector and are up for taking risk then they may invest in these funds as it is a high risk - high return fund.
3. Risk Profile:
The risk levels related with the banking funds are fairly high since they go forward with investing only in shares of one sector. These funds are expected to do well when the banking sector is on boom. Hence, these funds are suitable for aggressive investors and might bother investors with low risk appetite.
4. Investment tenure:
Since the risk of concentrations related with these funds is on the higher edge, it requires investors to have a long tenure of investment. Staying invested for an extended period of time will make sure that the risks are minimised and mitigated to a greater extent. It is always suggested to opt for these funds if your investment tenure is at least 5 years.
TAXATION OF BANKING MUTUAL FUNDS
Since banking funds are equity funds, they are essentially taxed like any other equity fund. The dividends offered by all mutual funds are added to the investors overall income and taxed as per the applicable slab of income tax they fall under.
This way of taxing dividends is referred to as the traditional or classical way of taxing the dividends.
STCG are released on redeeming the units within a holding period of 1 year and these gains are taxed at 15% irrespective of the tax slab rate.
LTCG are realised selling the fund units after a holding period of 1 year and these are taxed at 20% with no benefit of indexation provided.
TOP 3 BANKING FUNDS TO INVEST IN 2021
|FUND NAME||FUND CATEGORY||5 YEAR RETURNS|
|ABSL Banking & Financial Services Fund||Equity - Banking||12.66%|
|ICICI Prudential Banking & Financial Services Fund||Equity - Banking||13.43%|
|Nippon India Banking & Financial Services Fund||Equity - Banking||12.23%|
^As of 30th September 2021
WHO SHOULD INVEST IN BANKING MUTUAL FUNDS?
Since these funds are equity sectoral funds, they essentially carry some higher risks when compared to other mutual funds. Hence, banking mutual funds are more ideal for investors who are willing to bear high risk in exchange for the potential of benchmark beating and above par returns when the sector is in boom.
These funds can prove ideal to investors who have a high risk appetite and seek to tap on the potential of the banking sector stocks and earn high returns in the long term. It is mandatory to have a long term horizon to mitigate the risks as we discussed. Investing in these funds gives exposure to a lot of potential and opportunities.