The banking and financial sector has performed reasonably well in the past few months, especially, with more banks extending credit facilities such as loans and credit cards to customers relying on credit to make purchases. This sector has delivered over 100 per cent returns in the past five years, thus, highlighting its resilience to continued economic fluctuations and its contribution to India’s economic strength.
With this sector wooing investors already invested in the Nifty Bank’s performance in the past few months, does this hint at the need to invest exclusively in this sector? Viral Bhatt, Founder, Money Mantra said, “While the sector has performed well in recent months, it is important to remember that it is cyclical and can be volatile. Investing exclusively in any one sector is risky, and it is always advisable to diversify your portfolio.”
There is a certain quantum of risk involved in every sector. Stressing on the same, Basavaraj Tonagatti, a Certified Financial Planner (CFP), SEBI Registered Investment Adviser and a Finance Blogger at BasuNivesh shared, “The banking sector is less volatile than all other sectors and acts like a service sector for other industries. However, if you compare the banking index with the Nifty 50 index, the banking sector sometimes fails to provide a decent return than the risk investors will take. Above that, even though it looks attractive, many investors fail to digest the excessive risk associated with the banking sector. Hence, I prefer to avoid the banking sector.”
Quant Mutual Fund recently came out with the Quant BFSI fund. Investors inclined to allocate a portion of their earnings to the banking and financial services sector find this new fund offer (NFO) enticing.
However, Rishabh Parakh, Chief Play Officer, NRP Capitals warned against succumbing to the temptation of putting money in a sectoral fund as this. Parakh explained, “Sectoral funds are always easy to enter but those without an exit strategy won’t make money even though the BSFI looks good. Be clear about when to exit a sectoral fund. Never invest in a sectoral fund unless you are doing it based on your risk profile. Sectoral funds come with a high-risk reward proposition and timing the exit. If you make a good profit when the sector outperforms is extremely important apart from having the patience to stay silent when the sector remains stagnant for years together. It can check your patience really well.”
New-age investors are inclined to take risks, thereby, choosing to put money in thematic funds. However, personal financial analysts do not find it worthwhile to put money exclusively in a BFSI fund.
Nisha Sanghavi, a Certified Financial Planner & Director, Promore Fintech said, “When one invests money without goal setting and asset allocation it isn't the right way. Investing in thematic/sectoral funds is much riskier than normal equity-diversified funds. Sectoral funds are cyclical in nature and have the timing to invest and book profits and exit too. The younger generation these days is very short-sighted and has biases about making higher returns in a shorter time. Higher returns would come with higher risk is forgotten.”
Not all is hunky dory about investing in sectoral mutual funds. These funds though yield considerably high returns in the long run and can subject the investment amount to extreme volatility. Also, no sector performs consistently over a period. There is a cycle involved, which means you might have to wait for a prolonged period, say five years to a decade for the sector to again perform and earn the desired returns.
