Why investing in a Bank Nifty fund makes sense when the economy revives – Moneycontrol

My Account
Follow us on:
Powered By
Learn, discover & invest in smallcases across different types to build your long term portfolio.
Invest Now
Explore from India`s leading investment managers and advisors curating their strategies as smallcases.
Invest Now
Powered By stockal
Diversify your portfolio by investing in Global brands.
Invest Now
Pre-configured baskets of stocks & ETFs that you can invest
in with a single click. Developed by hedge funds, global
asset management companies, experienced wealth
management firms and portfolio managers.
Invest Now
Gamechangers
AMBAREESH BALIGA
Fundamental, Stock Ideas, Multibaggers & Insights
Subscribe
CK NARAYAN
Stock & Index F&O Trading Calls & Market Analysis
Subscribe
SUDARSHAN SUKHANI
Technical Call, Trading Calls & Insights
Subscribe
T GNANASEKAR
Commodity Trading Calls & Market Analysis
Subscribe
MECKLAI FINANCIALS
Currency Derivatives Trading Calls & Insights
Subscribe
SHUBHAM AGARWAL
Options Trading Advice and Market Analysis
Subscribe
MARKET SMITH INDIA
Model portfolios, Investment Ideas, Guru Screens and Much More
Subscribe
TraderSmith
Proprietary system driven Rule Based Trading calls
Subscribe
Moneycontrol  PRO
Moneycontrol  PRO
Curated markets data, exclusive trading recommendations, Independent equity analysis & actionable investment ideas
Subscribe
Curated markets data, exclusive trading recommendations, Independent equity analysis & actionable investment ideas
Explore
STOCK REPORTS BY THOMSON REUTERS
Details stock report and investment recommendation
Subscribe
POWER YOUR TRADE
Technical and Commodity Calls
Subscribe
INVESTMENT WATCH
Set price, volume and news alerts
Subscribe
STOCKAXIS EMERGING MARKET LEADERS
15-20 High Growth Stocks primed for price jumps
Subscribe
The debate and research on active versus passive have shown that passive large-caps have done better as the scope for the active fund manager is limited to 100 stocks, whereas in small-caps, active management has done better as the fund manager has a wider scope. In the passive funds space – index schemes or exchange traded funds (ETFs) – several options are available.
You can either play it through the headline indices such as the Nifty 50 or Sensex, or you can participate in the large-cap oriented sectors that look promising. The dominant sector in Nifty 50 is financial services, with 35.6 percent weight. Within the segment, banking is the major constituent. There is a reason why financial services or banking is the dominant sector. As our economy develops, the sectors that contribute to the GDP and along with it to the stock market growth, the weightage assigned through market capitalization changes to reflect the new reality and expectations.
Nifty Bank’s outperformance
The Nifty Bank Index has delivered 17.6 percent CAGR on price terms (PRI) and 19.2 percent on total terms (TRI) between January 1, 2000 and December 31, 2021. Over the same period of 22 years, the Nifty 50 delivered 11.5 percent CAGR on PRI. Nifty Bank TRI has outperformed the Nifty 50 TRI in six of the last 10 years, from 2011-12 to 2020-21. The outperformance shows the relative importance and future potential attached by the market to the banking component of the headline index, which has contributed to the high weightage of the financial services sector. The Nifty Bank Index captures around 88 percent of the market capitalization of listed banks. There are 12 stocks in the Nifty Bank Index, of which 10 are private sector banks and two are PSU banks.
Now, the question is, if the Bank Index has outperformed, what is the investment thesis for the future? From the start of the COVID-19 outbreak in early 2020, the Nifty Bank Index has underperformed the broader market. From March 31, 2020 to December 31, 2021, the Nifty 50 has delivered a CAGR of 49.3 percent (PRI), whereas the Nifty Bank has delivered a CAGR of 42.2 percent (PRI). Though future returns are a function of multiple factors, as an indication, the price to earnings (PE) ratio of Nifty Bank Index was 22.3 as on December 31, 2021, against 24.1 for the Nifty 50. The price to book (PB) ratio of the Nifty Bank Index is 2.62, as against 4.37 for the Nifty 50, on the same date. The P/E ratio of the Bank Index is attractive now; it is at 22.3 now against 30.1 as of December 2020, 40.8 as of December 2019 and 54.5 as of December 2018.
Asset quality
The quality of assets of Banks, in terms of gross and net NPAs, has shown improvements in the challenging phase of the pandemic. Along with economic recovery, over a period of time, credit off-take from Banks would improve from the current muted levels. Lending rates, as and when the RBI reverses the interest rate cycle, would increase as well. The floating rate loans would be reset faster. For MCLR based loans, it would take time till deposit rates move up, but that will eventually happen. Fintech companies seem to be giving competition to banks and are threatening to take away business, but it is a “co-opetition” as fintechs do not have banking license.
How to take exposure
Copyright © e-Eighteen.com Ltd. All rights reserved. Reproduction of news articles, photos, videos or any other content in whole or in part in any form or medium without express writtern permission of moneycontrol.com is prohibited.

source

Leave a Comment