Last week, I recommended to invest in Infrastructure mutual funds in India. This week, I am coming up with another set of sector based mutual funds which is banking sector mutual funds. There are several reasons why you should invest in banking sector mutual funds now to grow your money faster compared to equity funds. In this article, I would provide some insight about how the banking sector is expected to grow in future, risks involved and 3 promising banking and financial services sector mutual funds which you should invest in India now in 2014.
What are banking sector mutual funds?
If you are already familiar about this, skip this section. Mutual fund schemes that invests purely in banking stocks and financial services stocks are termed as banking sector mutual funds. They invest in a variety of stocks like SBI, ICICI Bank, HDFC, HDFC Bank, etc. which are in banking and financial services sector.
Why banking sector is expected to grow in coming years?
There are several positive things happening in the last 6 months, which can boost the banking and financial services sector in the coming years.
Reason # 1: New Government focus on Infrastructure growth:
Like I indicated in my last week's article, new government is expected to put major focus on Infrastructure growth. While construction and Infra companies are going to be the direct beneficiaries of this, indirectly banking and financial services sector would get benefited with this move. The funds required for such Infra development would pass thru the banks/financial services sector. This would benefit the banking sector in next 3 to 5 years time.
Reason # 2: Banks performance improved:
Large banks have been performing well in terms of financials. Non-Performing Assets are under control. Under the tight controls from the RBI, the banking sector is going to perform well in the coming years.
Reason # 3: McKinsey expects good growth in next 6 years:
McKinsey, a global management consulting firm has released a report few months back about the banking sector. The report titled “Reimagining Banking in India”. This report indicates that by 2020, Indian Banking Sector will be shaped by a strong interplay between the external environment and actions by policy makers and banks. They have outlined three potential scenarios that might emerge as a result, and have qualitatively and quantitatively described the differences in inputs and outcomes. This report provides a positive outlook on banking sector in coming years.
Reason # 4: FDI in the banking sector could increase:
There are several requests to Govt. In India to increase FDI in the banking sector. This would help more inflow of funds to banks and such funds can be used for bank’s business growth.
Reason # 5: Experts say that banking sector may create 20Lakh new jobs:
There are several experts who are indicating that the banking sector can create 20L new jobs in next 5-10 years and 2014 would be starting point for that (Source: Thehindubusinessline). Unless there is business demand, such high employment sources may not be possible. This would indicate that the banking sector would continue to flourish for next few years.
Reason # 6: New Banking Licenses to boost banking sector:
RBI has issued new banking licenses recently, . These new banks are expected to tap new emerging markets and would do innovatively to enter the market. This raises hopes on the banking sector.
What are the risks involved in banking sector funds?
High Risk: Sector funds are always high risk investments. In case sector is in a downturn, you could see huge falls in your capital investment. You might be seeing such downturn in FMCG funds now.
Tighter controls of RBI: While it is good to have tight controls from RBI, some of the measures from RBI would not help the banks to grow. We have seen several instances in the past about RBI takes such measures time to time.
NPAs can increase in the future: Though Non Performing Assets (NPA’s) are under control now, any increase in defaulter of loans in the future can reduce the profits of the banks and financial services companies. We could see this clearly in 2007 Global Financial Crisis where defaulters increased drastically in US and several banks and financial services companies collapsed.
3 Promising Banking Sector Mutual Funds to Invest now
Now, I would come to a final point about choosing best banking mutual funds in India. Based on past 5 years performance, Valueresearchonline rating, AUM, we have chosen 3 promising banking sector mutual funds which you can invest in India now. These banking mutual funds are expected to double your money in next 3 to 4 years or expected to provide 15%+ annualized returns in next 5 years.
Conclusion: Banking sector outlook looks positive. There are several positive indicators to prove this. With the new government formation, some of these indicators are going to happen. I am positive about Banking Sector Mutual funds and planning to invest in such funds through SIP and expecting good returns in next 3 to 5 years time frame.
Happy investing in Banking Sector Mutual funds!!!
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