Banking Mutual Funds- Concept, Features, Benefits, Limitations & more

There are plenty of reasons why you should invest in Mutual Funds, precisely Banking Mutual Funds. But when it comes to the best mutual fund selection, you hardly find a few suggestions on it.

No one shares a comprehensive discussion with you on this very important thing. 

Suppose you are searching for some stable and top-performing plans that promise you a higher return. It’s no surprise that you probably got to hear about banking mutual fund. 

An experienced investor who often prefers to include at least one banking-related asset in his portfolio will surely find it an interesting mutual fund scheme. 

Banking Mutual Funds in today’s financial market are evolving into the most popular investment option. As the name sounds, these mutual funds invest primarily in India’s fourth-biggest sector. 

But what is the proper definition of these funds? Why these funds are special, and what are their benefits and future scope? 

If you are also curious to find the answer to all such burning questions, come along! Take a plunge into this article and find out why Banking Mutual Funds can be your next Mutual Fund investment option. 

What are Banking Mutual Funds?

In simple words, banking mutual funds are a type of funds that predominantly invest in Indian Banking or Financial Services Sector.

For instance, Asset Management Companies or Fund houses either invest complete fund or a portion of these funds in the banking sector.

The investments are made in such a way, so it meets their financial goal. In a nutshell, it is a sector equity fund. Hence, one should be familiar with its nature.

For instance, in favorable market conditions, the sector funds can prove to be highly profitable and may outperform the market. 

At the same time, these funds underperform as well if the market is going through unfavorable conditions.

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What makes Banking Funds Special?

Over the last couple of years, we have seen exponential growth in the Indian banking and financial sectors. 

No wonder, the sector has emerged into one of the most popular investment platforms among an investor. 

According to economic times report, in the year 2020, this mutual fund category has offered almost 21.38% returns to the investors within one month. 

Even though pandemic has posed a drastic impact on the economy, the banking sector has also suffered a 28% drop in one year. Still, it is booming at a surprising rate. 

As compared to other industries, banking and financial sectors are playing a critical role in economic growth. 

This sector is like the backbone of any country, and due to government support, the sector is mushrooming year upon year.

That’s why investors prefer to invest funds in banking funds. It creates a win-win opportunity for every participating identity in these funds.

Though, these funds aren’t entirely safe. Hence, you should keep yourself away from investing in these funds if you are a risk-averse investor. 

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Why one should Invest in Banking Mutual Funds?

Indian Banking Sector is consistently performing well in the financial market.

That’s why, over the last few years, this mutual fund investment category has become the first-choice among investors. 

Let’s discuss some good-reasons that make Banking Mutual Funds relatively the best choice. 

Performance

The banking sector is ahead of India’s some of the leading sectors, e.g., IT sector and much more.

Hence, almost every fund manager looks forward to these banking mutual funds due to their high returns expectancy from this MF category.  

Booming Demand 

In India, the demand for bank account has exponentially increased over the last few years. According to the IBEF study, more than 80% of people in India have an active bank account. 

It encourages investors to enter in the banking category because the growth rate is relatively higher.  

Strong Regulations

Banking sector runs under government supervision. They follow all the rules and regulations set by top-tier authorities that engage people as it makes the Banking Sector quite reliable. 

Similarly, it becomes an attractive sector among investors as well as Fund houses.  

Broad Market

In India, the banking sector continues to rank higher as one of the fastest emerging sectors. Year upon year, it is mushrooming and covering a broad market in India.

In the economic growth of the country, the banking sector has registered a remarkable contribution.

All public banks, private banks, regional rural banks and foreign banks make the banking sector the fastest evolving sector. 

People take loans and deposit their savings in the banks, and businesses operating world-wide initiate transactions through these banks that highlight their crucial role in the financial industry on a big picture. 

No wonder, the banking sector has much to give to the investors.  

Recent Developments

The banking sector is expanding; every bank in India is branching out and establishing its branches all over the country. 

Also, technology’s contribution is also considerable. Internet banking has risen at an exponential rate over the last few years. 

The banking sector has improved a lot than ever before that raises the demand for Banking Mutual Funds as well. 

It’s no surprise that these funds will keep performing well for many years. Now let’s have a quick overview of the major benefits associated with these funds. 

Benefits of Banking Mutual Funds Investment

Here are the various benefits of Investing in Banking Funds –

Higher Returns

The key reason that proves Banking Mutual Funds an attractive option among investors is its higher return generating quality. 

In 2017, economic times mentioned in one of its articles that, year upon year, the returns from banking sector almost doubled. 

As per their 2017 analysis of the banking mutual funds, they found this MF category grew 15.30% over the previous five years. 

This percentage indicates this mutual fund category’s good performance, making it relatively the best mutual fund alternative.  

Protection

Indian Banking Sector works under the supervision of top-tier authorities, such as RBI and the Indian government. 

Therefore, in case of volatility, your investment can stay safe because RBI and government make new policies and bring changes to ensure the stability in India’s one of the biggest sectors.  

Stability 

Indian Banking Sector is more stable as compared to any other sector, e.g., Automobile, IT, Oil and Gas. 

Due to economic threats, where other sectors go through heavy losses, the banking sector appears to be a steady-player because it gets support from the ‘government of India.’ 

It ensures stability in the banking sector. That means there are relatively fewer chances of the downturn in the ‘Banking Mutual Funds.’ 

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Things to consider before Investing in Banking Mutual Funds

Before deploying your hard-earned money in such mutual funds plans, make sure you are already well-familiar with this investment scheme. 

TV news and article often encourage you to invest in these mutual funds, but you should first get a comprehensive overview of the respective mutual fund scheme before investing. 

Going forward with the slightest error can later make your entire amount vanish. If you want to become a winning player, make sure your investment decision is well-informed. 

An in-experienced fund manager can deploy your money in poorly performing market. Hence, a careful inspection is requisite before diving in.

A diversified portfolio doesn’t make this mutual fund scheme a productive option because investments are made in a single sector. 

Though many mutual fund companies invest a few portions in other assets, it ensures the portfolio stays productive and less risky. 

Banking Mutual Funds are a good alternative, but we can’t overlook the limitations and risk associated with this Mutual Fund scheme. 

Limitations of Banking Mutual Funds

Here are the few drawbacks of Banking Mutual Funds –

Costly

The demands of Banking Mutual Funds are relatively high in the market; that’s why this investment plan often appears to be a bit expensive.

Often fund houses hire a big team of experts to analyze the market’s performance that automatically raises the overall expense ratio.  

Risky

Banking Mutual Funds invest in equity related instruments, so they are also risky. Also, these mutual funds comprise 80% of investments in equity funds. 

Even though the portfolio is working upon the principle of diversification, it is still not always worth it. This is because assets are allocated within the same sector. 

That’s why investors often try to keep the banking sector proportion minimal in their investment portfolio. Also, these mutual funds may underperform in unfavorable market conditions. 

So make sure you are aware of these considerable points that make Banking Mutual Funds less attractive for risk-averse investors.

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Banking Mutual Funds – Conclusion

Despite the fact that banking mutual funds have a few underlying limitations, still, we can see the right future of such MF plans. 

The banking sector is booming; the history witnesses the banking sector’s growth potential that raises the expectancy from Banking Mutual Funds. 

Digitalization has increased the use of digital banking, which is another indication of these MF plans’ success. However, lots of development and changes are to come in the sector. 

That’s why it is high time to take a wise decision. But try to invest in Banking Mutual Funds with a long-term vision. It will help you to generate higher returns at minimal risk.  

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