From the turn of the century, the industry has been growing at 20 per cent per annum. And it is estimated that in the coming years, Indian banks are expected to grow at 35 per cent per annum.
In a growing economy, this sector is a direct beneficiary. What's even better is that its net non-performing assets (NPAs) have come down considerably from 8 (in the year 2000) to 1 per cent today.
To fund this growth, banks would need funding to the tune of $14 billion. This is one of the reasons the Reserve Bank of India (RBI) is opening up the sector to foreign players next year. From 2009 onwards, foreign banks would be allowed to acquire up to 74 per cent of any Indian bank.
The domestic players will benefit from the essential capital and expertise while the foreigners would get a foothold into this lucrative sector (for new players) and have the ability to reach a larger audience (for the existing ones).
In recent times there has been considerable investment by international banks like Citigroup, HSBC, Bank of America and Deutsche Bank to scale up their operations in India. Moreover, foreign institutional investors (FIIs) are also betting on this sector. As many as five public sector banks (PSB) have exhausted their limit of FII investment, with three more along with four private sector banks in the caution zone.
The only way out for FIIs is to now tap the banking exchange traded funds (ETFs) and sector funds focussed on the banking sector. This could explain why in the past 12 months the average monthly growth in the units of equity banking funds has been around 24 per cent.
At present, there are three open-ended equity banking funds in the market, while another two should be available for investment soon. Four more are still in the approval stage. But each of the existing three have their own character, the similarity begins and ends with the common sector.
Their investment strategy, market cap preference, choice of scrips and type of stocks vary. And these banking sector funds don't have a mandate limited to pure banking players. Financial institutions and brokerage stocks also find a place here.
While we look at the three equity funds in our analysis, there are also three ETFs available for investment. Like its cousins in the equity category, the Banking BeES, the largest ETF has rewarded its investors by giving a return of 36 per cent since inception.
So if none of the equity funds appeal to you, you could even look at this option. All said and done, this sector deserves a presence in any portfolio.