Introduction
While everyone is aware of mutual funds, hardly anyone talks about Banking Mutual Funds. What are these? This article will take you through this class of investments and help you understand its benefits and the future prospects of Banking mutual funds.
Banking Mutual Funds
These funds target the Indian banking sector. Asset Management Companies either apportion all or a part of their funds in the banking sector to meet their financial objectives. Don’t confuse banking mutual funds with AMCs floated by banks in association with private sector companies. That is an entirely different story altogether.
Features of Banking Mutual Funds
Banking mutual funds are a subset of the overall mutual funds’ industry in India. Before understanding the key features of the banking mutual fund industry, let’s understand what a typical mutual fund looks like.
A mutual fund is a professionally managed investment pool that invests its corpus into various securities of different companies. Every mutual fund is managed by an Asset Management Company. These funds are called mutual because the pool is composed of contributions from several investors. These contributions flow in periodically –weekly, fortnightly or monthly. Each fund has a maturity date and once past that date, the fund shares its earnings with its depositors after the Asset Manager’s fees are accounted for.
The AMC doesn’t allocate its funds randomly; rather it scouts for the best-performing companies and then invests its funds there. Some of the companies where the AMCs invest are banking, oil and gas, pharma, consumer goods, etc. Of late, the Indian banking sector has emerged as one of the favorite investment channels for the AMCs.
Why is this sector an attractive bet?
Over the years, the Indian banking sector has become a premier choice of fund managers.
1. Performance
In 2018 August, this sector delivered 5.08 % over the last month. If we look at a three-month time span, the returns were 4.08%.
Many fund managers look at performances in a three month period and here, it can be seen that the banking sector is ahead of the IT sector and many large-caps.
2. Growing demand
There has been a rising demand for bank accounts in India. As per an IBEF study, currently more than 80% Indians have a bank account. A few years back, this figure stood at just under 60%. With so many people in the banking sector, this mutual fund vertical looks very promising indeed.
3. Strong regulations
When India became independent in 1947, Indian banks were supposed to be the agents of economic change. They were supposed to encourage people, especially the rural ones, to save more. As the banks’ kitties swelled, successive governments brought in tight controls and regulations. Today, the Indian banking sector is well regulated and this characteristic makes this sector very attractive for Asset Management Companies.
4. Market Size
India’s banking sector is the fourth largest in the emerging sector in terms of retail credit offtake. In December 2014, the market size was $ 181 billion which further increased to $281 billion in 2018 December. This growth underlines the role of the banking sector in the economic development of India. Most of these loans go toward building companies, acquiring assets, growth and diversification.
Let’s have a look at the total number of banks in India- 27 public sector banks, 21 private sector banks, 49 foreign banks, and 56 regional rural banks. In addition, there are 1562 urban credit banks and 94,000 rural cooperative banks. Lending increased 11 percent in 2017-2018 while deposits grew by 10 % in the same period. These figures make the Indian banking sector very attractive indeed.
5. Non Performing Assets
It is a fact that our banks have been plagued by rising nonperforming assets or bad loans. However, over the past few years, the government has tightened the loan sanctioning norms and today the NPA/ deposit ratio of our banks has come down significantly.
6. Recent developments
Of late, the Government of India has allowed several non-banking players to enter this sector. For example, in September 2018, the Department of Posts was allowed to open its India Post Payments Bank. Today, this new bank has 650+ branches all over the country thus improving the financial inclusion index of the country.
7. Mergers and Acquisitions
To make the banking sector even more competitive, the government has made mergers and acquisitions easier. In 2017, IndusInd Bank Ltd and Bharat Financial Inclusion Ltd merged together and the total deal was US$2.3 billion.
Looking at all the above indicators, it is easy to infer that the Indian banking mutual fund sector is performing very well.
The next section describes why it makes sense to invest in the banking sector mutual funds.
Benefits of investing in banking mutual funds
1. As per an analysis published in The Economic Times in 2017, banking sector mutual funds 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.
2. 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.
3. 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.
Do all the mutual funds targeting banks perform equally well? Not really. Here are the top banking sector mutual funds that you should consider.
Popular Banking Sector Mutual Funds
1. Kotak PSU Bank ETF
This mutual fund has had a one year return of 55.9%. Holdings in this mutual fund are led by State Bank of India (62%), Punjab National Bank, Bank of Baroda, and Canara Bank. Since its launch, the Kotak PSU Bank mutual fund has delivered a 3.13 % return and 268 % in turnover.
2. Reliance Banking Fund
Launched in 2013, this fund has delivered a 42 % return and is a top performer in this category.
3. Birla Sun Life Banking and Financial Services Fund
Coming from the landmark Nifty Finance Service, this banking mutual fund has delivered a return of 31.25% with a turnover of 30%. Birla Sun Life is a high return, high-risk fund and the minimum investment required is Rs. 1000. This bank claims an annual return of 40%. The sectoral allocation of this fund comprises companies from the banking/ financial services and manufacturing verticals. Leading asset holders are Yes Bank and ICICI Bank.
4. ICICI Prudential Banking Fund
Value Research says that this Fund is one of the top performing ones in the mutual fund market. It delivered an astonishing 23 % in the first half of 2017.
Future Potential
Banking sector mutual funds have a bright future in India. However, this is contingent upon many factors, one of them being continued banking reforms. Banking mutual funds will grow further if a higher number of account holders transact regularly. At present, nearly 12% of all bank accounts are dormant i.e. there are no transactions.
Banking sector mutual funds will receive a further boost when there are a significant number of people making digital payments.
For the common investor, there is a word of advice. Never invest for short term, always have a long-range investment window.
Conclusion
Banking sector focused mutual funds are performing handsomely over the past few years. There are various reasons behind this such as an increase in penetration of banks, reduction in NPAs, and making it easier for banks to merge and acquire each other. This sector will perform further if the government and the banks reduce the NPA ratios even further and enable digital transactions on a larger scale.
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