Mutual funds have become financial instruments that offer high returns. They carry low risk as compared to regular stocks and shares. This is because a mutual fund corpus is created across different assets and securities that offer a cushion against risk. Banking Mutual funds consist of bank-specific securities. The risk level of sector-specific funds depends on how well banks perform and their policies. Understanding your risk profile is essential before investing in sector-specific stocks.
In this blog, we have discussed banking mutual funds in detail, and how they work. We have also discussed their advantages and ways in which you can invest. This guide will help you to decide if banking mutual funds are good for you or not.
Banking Mutual Fund Meaning
A banking mutual fund typically has a greater allocation in stocks of banks. These Mutual fund portfolios are created by investing pooled money into banking securities. These mutual funds enable investors to bank on the boosted performance of the banking sectors leading to high returns. However, banking mutual funds are sector-specific funds and therefore they carry a high risk.
How Do Banking Mutual Funds Work?
Banking mutual funds are similar to mutual funds but unlike the former, these invest only in stocks of banks and fintech companies and offer better returns. Here is a detailed insight into the same.
1. Pooling of Funds
The fund corpus of banking mutual funds is created by aggregating money from multiple investors. This happens when investors purchase units based on the fund’s NAV and they gain a proportionate stake in the total corpus.
2. Investment Focus
These mutual funds portfolios are created by investing in the stocks of banks. The fund manager analyses the stocks to create a portfolio which offers high returns. However, these mutual funds come under the high-risk category because they invest in a single sector and offer less diversification.
3. Professional Management
Banking mutual funds are also managed by experienced fund managers. They choose by analysing bank stocks that have a positive outlook in the long run. Their expertise aims to generate optimal returns for investors while managing risk effectively.
4. Diversification Benefits
While focused on the banking sector, these funds often invest in multiple banks. This diversification reduces the risk associated with investing in a single bank. However, banking trends influence the overall performance of the fund.
5. NAV
Net Asset Value determines the current value of each fund. The manager calculates the NAV by dividing the net assets value by outstanding units on a daily basis. Hence, this value varies based on the performance of the bank stocks.
Advantages of Banking Mutual Funds
Investing in a banking mutual fund because it offers high returns due to growth. Here are the major advantages that it offers.
- Mutual funds are managed by a fund manager who takes care of everything. Hence, here you have to only invest and no need to actively manage your investments.
- The government policies have boosted the growth of the banking sector. This makes banking mutual funds the safest option to invest in.
- Mutual funds benefit investors with diversification. You can invest in different types of assets irrespective of available finances. This helps to reduce the overall risk.
Tax Rules for Banking Mutual Funds
Investing in mutual funds also offers tax benefits for capital gains. Here are more details related to it.
- If you sell your units before 365 days, Short term capital gains are taxable i.e. 20%. However post 365 days, Long term capital gains apply @ 12.5% over and above 1.25 Lakhs.
Things to lookout before Investing in Banking Mutual Funds
Investing in Banking Mutual Funds is a simple process but investors have to do deep research. Here are some measures which you can take before investing in banking mutual funds.
- Find out the reason or goals for your investment before investing your money. Defining your investment goal is important to maximise the profit level.
- Next, comes risk tolerance. You should assess your risk level before finalising a mutual fund. If you are a senior citizen then go for a mutual fund portfolio which is less risky. Whereas, high-risk portfolios work best for young investors.
- Assess risk tolerance. How much risk are you comfortable with? Lower-risk funds are for senior citizen investors.
- Fund management is another factor that should be considered when investing. You should analyse the market from time to time and see that the fund manager manages your mutual fund well.
- You should choose mutual fund portfolios that have a low or no exit load.
- Finally, check the liquidity and size of the fund. Do a deep analysis of the terms and conditions. It will help you to know if it is easy to buy and sell shares in the fund. How large is the fund?
Conclusion
On a final note, baking mutual funds allows investors to invest in the banking sector to earn high returns. However, they come with high risks as they belong to the sectoral industry. Hence, assess your investment goals and risk tolerance before investing. Considering all the factors will help you to make a wise investment decision.
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Disclaimer – This article is for educational purposes only and does not intend to substitute expert guidance. Mutual fund investments are subject to market risks. Please read the scheme-related document carefully before investing.
