Best Banking Mutual Funds to Invest in 2022

Thematic or sectoral mutual funds are those schemes which make concentrated investments in a particular sector or industry. They invest all or a significant part of their assets in equity securities of one sector. For example, banking mutual funds invest their funds in stocks of banking and other financial services companies. 

It targets the core banking companies and other financial services providers to generate significant returns for its investors. The fund managers may invest in large, medium or small cap banking sector companies according to their vision and objectives. 

Top Performing Banking Sector Mutual Funds 

Here is a list of the best banking mutual funds that you can invest in 2022:

You can invest in these banking sector mutual funds after assessing your financial goals. 

How Do Banking Mutual Funds Work? 

A banking sector mutual fund invests primarily in two industries – core banking industry and financial service industry.  The former deals with traditional banking solutions like opening bank accounts, accepting deposits and granting loans. However, the latter covers a wide domain of financial activity with the primary goal of boosting liquidity in the economy. 

As per SEBI requirements, a banking sector mutual fund must invest at least 80% of its corpus in stocks of banking and financial services companies. Managers use their strategies and analysis to try to outperform benchmark indices by investing in opportunistic financial stocks.

Who Should Invest in Banking Mutual Funds?

You can invest in banking mutual funds if the following parameters are satisfied: 

• High risk 

The banking sector funds are equity-oriented mutual fund schemes having an inherent risk due to the volatile nature of equities. Therefore, you can consider investing in these funds if your risk tolerance level is high.  It may not be a feasible or lucrative investment alternative for risk averse investors. 

• Investment horizon

You can invest in these types of mutual fund schemes if you have a long term investment horizon. As equity mutual funds have a tendency to provide meaningful returns in a long term scenario, you should consider staying invested for a long time period.  Therefore, you can consider this investment option if you have surplus funds to park for the long term. 

• Investors with knowledge about the banking sector

As sectoral funds have their own complexities and peculiarities, it requires a decent working knowledge of stock markets and the behaviour of banking equities. This is because you must have a concrete entry and exit point in regard to these funds. This involves constant monitoring of stock markets and thorough research about the banking industry. 

• Return 

Due to the volatile nature of equity instruments, these funds generally experience sharp fluctuations in their unit price or net asset value over time. Hence, the returns from these types of funds are not guaranteed and depend heavily on market fluctuations. If you are ready to bear fluctuations in the fund value, you can invest in these mutual fund schemes. 

Advantages of Investing in Banking Mutual Funds

Here are some advantages of investing in banking or financial mutual funds:

• Strict regulatory principles

Most of the financial institutions (Banks, AMCs, MFs, Insurers, etc) in India are governed by various regulators like RBI, SEBI, IRDA, etc. These regulators  constantly monitor the functioning of the financial sector and take preventive as well as corrective steps from time to time. As this industry is under the strict watch of the RBI, the  chances of unethical or bad corporate governance policies are not completely absent, but relatively low. 

As a result, financial service companies offer stability and better growth prospects in comparison to other sectors.

• Return potential

The banking and financial services industry is the backbone of an economy.  They may offer very high returns when the economy is doing well, and even in turbulent times, the stocks of these companies do not depreciate drastically. Hence, the return outlook of these banking sector funds seems positive. 

• Investment in big companies

Generally, the banking sector companies are large cap firms having stable market outlook and established presence. By investing your money in financial service mutual funds, your investment basket will get exposure to several large cap organisations, thereby offering better return potential. 

• Long term horizon

These funds can be used to fulfil the long term financial goals of investors. It may help in capital appreciation and wealth accumulation over a long time period.  It may be beneficial for individuals looking to fulfil long term objectives like building a home, marriage expenses or funding children’s education. 

Taxation of Banking Funds 

As already discussed, a banking fund is an equity-oriented mutual fund and is subject to taxation like other equity funds.  The gains or proceeds from the sale of mutual fund units are taxable under the head capital gains.  The gains are taxed under short term capital gains or long term capital gains, depending on the holding period. 

In case the holding period of these mutual funds is less than 12 months or 1 year, all gains arising from the sale of these are taxable under short term capital gains tax (STCG). On the other hand, if the holding period of these mutual fund units crosses the 1 year mark, all gains will be subject to taxation under long term capital gains tax or LTCG. The rate of taxation on STCG and LTCG has been discussed below:

However, in case of LTCG, all gains of up to Rs. 1 lakh are exempt from taxation under LTCG. 

Similarly, dividend income earned from these funds is also subject to taxation.  The dividend income gets added to your gross total income and taxed as per applicable tax slabs. 

Things to Consider Before Investing in Banking Sector Funds    

You must take into account the following points before taking any decision regarding investments in banking funds: 

• Banking regulations

The Reserve Bank of India introduces multiple changes in terms of rules and regulations throughout a financial year. This compels banks and financial institutions to change or modify their services, which has a direct impact on their performance in the stock market. Investors should consider keeping themselves updated about the different regulations that the RBI introduces in relation to the banking sector. 

• Risk appetite

One of the most important parameters while taking an investment decision is considering your risk appetite.  Being a sectoral fund it offers the least diversification amongst Mutual Funds. Also, these funds do well only when the banking sector is performing good. So, you need a high risk appetite as well as long-term horizon for these funds.  

• Past returns 

It is imperative that you analyse the past returns generated from the said mutual fund scheme and analyse its performance. The past performance of a banking mutual fund may give you an idea about the kind of return that your investment is going to fetch over the investment horizon.  

Sector Overview: 

Before making any investment in a sectoral fund, it is imperative for an investor to research about the specific industry. The Indian banking industry has recently witnessed the rollout of innovative banking models like payments and small finance banks. The government has also focused on increasing its banking sector reach, through schemes like the Pradhan Mantri Jan Dhan Yojana and Post payment banks. 

Further, the rising income of the population has been increasing the demand for online financial services. With more than 2,100 fintechs operating currently in India, our country is on its way to becoming the leading market player in terms of digital transactions, government financial initiatives and investment penetration in rural areas. By 2025, India’s fintech market is expected to reach Rs. 6.2 trillion (US$ 83.48 billion).

India’s banking sector is poised for robust growth as rapidly growing businesses are turning to banks for their credit needs.

Final Word  

The banking mutual fund is an efficient investment vehicle that focuses on the banking and financial services industry, which is the engine of the economy.  They directly reflect the health of the economy, and even during distressing times, they may not experience drastic capital depreciation.  This detailed guide on the best banking sector mutual funds will help readers understand the concept in a better manner. 

Frequently Asked Questions