ETF investment |  The banking sector: A smart way to play the banking sector

ETF investment | The banking sector: A smart way to play the banking sector – Mail Bonus

The banking sector has long been the thread that has intertwined the economy, enabling both broad and inclusive growth. Their main role is to bridge the financing gap in the economy. Along with a number of other services, banks provide private customers with the opportunity to keep their money safe in a savings account and also expand the possibility of investing and earning returns with their investment products.

Similarly, they pass on your savings to companies that need money to grow and grow and to retail customers who need capital to drive asset growth or consumption. In this way, banks act as a means of capital flow.

In the last two decades, banking and financial services have grown faster than GDP. As India recovers from the Covid-19 pandemic and gets back on track to become a $ 5 trillion economy, the banking sector will play a key role in enabling growth. At the same time, as the economy grows, the banking sector will witness growth at the same time.

Convincing opportunities are no better to ignore

The banking sector in India, especially private banks, has now emerged from the forest and the turmoil it had to deal with in the wake of the global financial crisis and the asset crisis. Private banks found it easier to raise capital to increase their business, and as a result, their share of Indian banking over the past 15 years has fallen from less than 10% to more than 30% now. In recent years, the asset quality of private banks has improved and the amount of outstanding assets has steadily declined. Thus, new opportunities are created due to improving lending growth and corporate profitability. Against the background of such a landscape, private banks in particular appear as a convincing long-term investment opportunity.

When it comes to creating a strong investment portfolio, stock selection becomes very important. As has been discussed, although the banking sector as a whole is poised to grow, private banks in particular seem convincing. Even within the private banking space, you would have to choose the best private banks and manage your portfolio accordingly. However, this is not an easy task and the trip may be cumbersome and not optimal. A great alternative to this could be to invest in the Nifty Private Bank ETF.

Investment easy

To reflect the performance of several private banks, the National Stock Exchange (NSE) created the NIFTY Private Bank Index. This index is designed to reflect the behavior and performance of banks in the private sector. The index consists of 10 shares that include ICICI Bank, Bandhan Bank, Federal Bank, IndusInd Bank, Axis Bank, Kotak Bank, HDFC Bank, RBL Bank, IDFC First Bank and City Union Bank. As a player investor, you can take adequate risks for your private banking space by investing in ETFs based on this index.

The ETF aims to replicate the performance of the Nifty Private Bank Index by creating a portfolio that holds the same private banks and the index and in the same proportion. There are several benefits to this approach:

Exposure to banking: Within the banking sector, private banks with a strong balance sheet, a large presence and relatively clean books are well placed to take advantage of the growing growth opportunities in India. By investing in the Nifty Private Bank ETF, you can easily take advantage of these opportunities.

No worries about stock selection: One of the biggest challenges in creating a strong investment portfolio is stock selection. To do this right, you need to do a lot of research, monitor market trends and understand valuation. Since the ETF simply repeats the composition of the underlying Nifty Private Bank Index, you do not have to worry about the right or wrong stock selection.

No worries about rebalancing: The main objective of the ETF is to mimic the underlying portfolio. This means that when the shares are purchased in an appropriate proportion, there is no need to actively manage the fund or establish a balance. Reconciliation only occurs if there is a change in the composition of the underlying index.

Low cost nature: The cost of managing an ETF is relatively low as it is not actively managed. As a result, both transaction costs and fund management fees are proportionally lower. This lower cost is passed on to the investor, enabling you to obtain the desired risk for low-cost private equity stocks.

Finally, if you are an investor who wants to invest in the Indian banking system and fits well with your overall asset allocation strategy, then Nifty Private Banking ETF is an opportunity you could consider for the long term growth of your investment portfolio.

(Chintan Haria, Head of Product Development and Policy, ICICI Prudential AMC)

(Disclaimer: Advice, suggestions, opinions and opinions given by experts are their own. This does not represent the views of the Economic Times)

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