Why banking and financial services funds are seen as a good long-term bet

The banking, financial services and insurance (BFSI) segment is once again drawing significant investor interest. The largest sector in India’s listed space by market capitalisation remained resilient during the recent market turbulence and has gained 13.9 per cent over the past two months. 

“BFSI companies are largely domestic oriented and thus relatively insulated from the ongoing global tariff wars, except for near-term weakness in capital market plays. Investors have hence preferred them. The sector returns trailed the broader market returns for the past two to three years, making valuations relatively attractive,” says Dhimant Kothari, fund manager, Invesco Mutual Fund. 

A diverse sector 

The BFSI space offers a broad mix of segments. “Apart from private-sector banks, there are non-banking financial companies (NBFCs), insurance and asset management companies, capital market intermediaries, and fintechs,” says Trupti Agrawal, senior fund manager–equity, White­Oak Capital Asset Manag­ement Company (AMC). Actively managed BFSI fu­nds allocate at least 80 per cent of their assets to sector stocks. Passive schemes track indices such as the Nifty Private Bank, Nifty Bank, Nifty PSU Ba­nk and Nifty Financial Services. 

Recent outperformance 

In the past three months, investors favoured large private banks, which were trading at reasonable valuations, and quality non-bank lenders. “Over the past few months, the BFSI sector has outp­erformed on account of impr­oving system liquidity, the Reserve Bank of India’s (RBI) change in stance towards being more accommodative with 50 basis points rate cut, and anticipation of further rate cuts in calendar year 2025 or financial year 2026. Also, government fiscal measures to boost demand while maintaining overall fiscal prudence have comforted the bond market with 10-year yields dropping to less than 6.5 per cent,” says Gaurav Kochar, fund manager–equity, Mirae Asset Invest­ment Managers (India).  

“The regulatory and operating en­v­ir­onment for lending is easing incrementally, a clear positive for banks and NBFCs,” says Agrawal. 

Growth drivers 

Lower interest rates and pro-growth government policies are expected to fuel the sector. “In the medium term, rate cuts and RBI measures to improve systemic liquidity should accelerate the pace of credit and deposit growth. From a more long-term perspective, the significant under-penetration of financial products like credit, insurance and investments makes financial services a multi-decadal and structural theme,” says Agrawal. Lower income tax rates cou­ld spur consumption, driving retail borrowing.  “These funds are well-positioned to capitalise on India’s low credit penetrat­ion (58 per cent credit-to-GDP vs. 170 per cent in the United Sta­tes),” says Kochar. 

Weigh sectoral risks 

Investors must be mindful of a few risks in these funds. “Sector funds carry relatively higher risk than diversified equity funds. Also, this sector is highly regulated. Any adverse regulatory changes can impact the profitability or growth prospects of the sector or firms. Negative developments relating to the sector impact sector funds disproportionately,” says Kothari. 

“Domestic economic slowdown (6.7 per cent GDP in FY25 versus the expected 7.2 per cent) and weak corporate earnings (4 per cent profit after tax growth in nine months of FY25) have raised a few questions on the sustainability of growth,” says Kochar. 

Long-term investment 

Experts recommend a medium- to long-term horizon. “They are suitable for investors with moderate-to-high risk tolerance seeking exposure to India’s long-term financial growth. A minimum investment horizon of three–five years with 5–8 per cent allocation in the portf­olio is recommended,” says Kochar.