Best Sectoral Banking Mutual Funds : India’s Top Performing Sectoral Banking Funds to consider to Invest in 2021

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Best Sectoral banking funds are equity mutual funds that concentrate their portfolio with equity and equity-linked securities of Indian banks. We have covered the following in this article on the best sectoral banking mutual funds:


1. Introduction to Sectoral Banking Mutual Funds

Sectoral banking mutual funds are those sector funds whose asset allocation is made mostly towards the equities of Indian banks. These funds are expected to do well and beat the benchmark when the banking sector is doing well. By investing in these funds, you gain exposure to a well-constituted portfolio of banking securities.


2. Top Sectoral Banking Mutual Funds

The following table shows the top-performing sectoral banking mutual funds based on the past 3-year and 5-year returns:


3. Who Should Invest in Sectoral Banking Mutual Funds?

Since sectoral baking funds are sector funds, they essentially carry a higher risk of concentration as compared to any other class of mutual funds. Therefore, sectoral banking funds are suitable for those investors who are willing to bear higher levels of risk in exchange for the potential to enjoy benchmark-beating returns when the banking sector is doing well.
These funds are apt for aggressive investors who seek to tap on the potential of the banking sector stocks and earn higher returns in the long run. It is necessary to have a long-term investment horizon to mitigate the associated risks to a greater extent. Investing in these funds gives you exposure to a portfolio constituted by the top-performing banking equities.


4. Taxation of Sectoral Banking Mutual Funds

Since these funds are a class equity mutual funds, they are essentially taxed like any other equity mutual fund. The dividends offered by all mutual funds are added to your overall income and taxed at the income tax slab rate you fall under. This way of taxing dividends is referred to as the classical way of taxing dividends.
Short-term capital gains are realised on redeeming your units within a holding period of one year. These gains are taxed at 15% irrespective of your income tax slab rate. Long-term capital gains are realised on selling your fund units after a holding period of one year. These gains are taxed at 20%, and there is no benefit of indexation provided.


5. Things to Consider Before investing in Sectoral Banking Funds

Since sectoral banking funds concentrate their portfolio by investing only in equity-linked securities of the Indian banking sector, they carry a higher risk of concentration. Hence, it becomes essential to have a long-term investment horizon to let your investments go through the market cycles and provide stable returns in the long run. Other than the risk of concentration, these funds come attached to market risk and volatility risk. Volatility risk is the possibility of the sudden change in the price of the security, which may result in significant losses upon redemption. Market risk is the possibility of losses due to the movement in the price of the securities for various factors that are beyond your control.


6. Things to Consider Before investing in Sectoral Banking Funds

You have to consider the following factors before investing in sectoral banking funds: a. Risk profile The risk levels associated with sectoral banking funds are fairly high since they invest only in the securities of a particular sector. These funds are expected to do well when the banking sector is doing well. Therefore, these funds are suitable for aggressive investors. b. Investment horizon Since the risk of concentration associated with these funds is on the higher side, it requires you to have a long-term investment horizon. Staying invested for a more extended period of time ensures that the risks are mitigated to a greater extent. It is advisable to enter these funds only if your investment horizon is at least five years.


7. Advantages of Investing in Best Sectoral Banking Mutual Funds

The following are the most significant advantages of investing in sectoral mutual funds:

  • You get exposure to a portfolio constituted by including top-performing securities of Indian banks.
  • You get the potential to earn benchmark-beating returns.
  • These funds are an excellent option to plan your long-term financial requirements.