Correspondingly, they channelise your savings towards corporates that need money to expand and grow and to retail customers who require funds to fuel asset growth or consumption. This way, banks act as a conduit for capital flow.
Over the last two decades, the banking and financial services sector has grown faster than the GDP. As India chalks a path of economic recovery in the aftermath of the Covid-19 pandemic and gets back on track to becoming a $5 trillion economy, the banking sector will play an integral role in enabling growth. At the same time, as the economy grows, the banking sector will simultaneously witness growth.
A compelling opportunity better not be ignored
India’s banking sector, especially private banks, has now come out of the woods and the turmoil that it had to deal with in the aftermath of the Global Financial Crisis and Non-Performing Asset crisis. Private banks had easier access to raise equity capital to grow their business and as a result, in the last 15 years, their share in Indian banking has gone from less than 10% to more than 30% now. Over the last few years, the asset quality of private banks has improved and the quantum of non-performing assets has steadily declined. So, newer opportunities are being engendered due to improving credit growth and corporate profitability. In the backdrop of such a landscape, private banks in particular emerge as a compelling long-term investment opportunity.
When it comes to creating a robust investment portfolio, stock selection becomes very important. As discussed, while the banking sector as a whole is poised for growth, private banks, in particular, look compelling. Even within the private banking space, you would need to select the best private banks and manage your portfolio accordingly. However, this is no easy task and the journey could be a cumbersome and sub-optimal one. A great alternative to this could be to invest in the Nifty Private Bank ETF.
Investing made easy
To reflect the performance of a few private sector banks, the National Stock Exchange (NSE) created the NIFTY Private Bank Index. This index is designed to reflect the behaviour and performance of the banks in the private sector. The index comprises 10 stocks which 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 lay investor, you can take adequate exposure to the private banking space by investing in an ETF 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 as the Index and in the same proportion. There are several benefits to this approach:
Exposure to Banking: Within the banking space, private banks with their strong balance sheets, large presence, and relatively cleaner books are well-positioned to capitalise upon the burgeoning growth opportunities in India. By investing in the Nifty Private Bank ETF, you can easily capitalise on these opportunities.
No worry about stock selection: One of the biggest challenges in creating a robust investment portfolio is stock selection. To do this right, you need to do a great deal of research, follow market trends and understand valuations. Since the ETF simply replicates the composition of the underlying Nifty Private Bank Index, you don’t need to worry about the right or wrong stock selection.
No worry about rebalancing: The primary aim of the ETF is to mimic the underlying portfolio. This means that once the stocks are bought in the appropriate proportion, the fund does not need to be actively managed or rebalanced. Rebalancing only occurs if there is a change in the composition of the underlying index.
Low-cost nature: The cost incurred in managing ETF is relatively low since it is not actively managed. As a result, both transaction costs, as well as fund management fees, are relatively lower. This lower cost is passed on to the investor thereby enabling you to get the desired exposure to private banking stocks in a low-cost manner.
To conclude, if you are an investor looking to invest in the Indian banking space and fit well with your overall asset allocation strategy, then the Nifty Private Banking ETF is an opportunity that you may consider for the long-term growth of your investment portfolio.
(Chintan Haria, Head- Product Development & Strategy, ICICI Prudential AMC)
(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)
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