ICICI Prudential has launched an index fund tracking Nifty Bank Index.
Is investing in the banking sector a good choice?
Who can invest in this Fund?
Who can avoid this Fund?
Let us analyze.
Table of contents:
- ICICI Prudential Mutual Fund
- Key-Features of ICICI Prudential Nifty Bank Index Fund
- Investment Objective of ICICI Prudential Nifty Bank Index Fund
- Investment Strategy of ICICI Prudential Nifty Bank Index Fund
- Outlook on Banking Sector: Key observations
- Pros of Investing in ICICI Prudential Nifty Bank Index Fund
- Cons of Investing in ICICI Prudential Nifty Bank Index Fund
- Final Takeaway
ICICI Prudential Mutual Fund:
ICICI Prudential AMC is the 2nd largest Asset Management Company in India. Their the Assets under Management (AuM) is around Rs. 4.8 Lac Crores.
Key-Details ofICICI Prudential Nifty Bank Index Fund:
Investment Objective of ICICI Prudential Nifty Bank Index Fund:
Understanding the investment objective of a fund will give you insights about the suitability for your portfolio.
The primary investment objective of this scheme is:
- To generate returns by investing in a basket of Nifty Bank Index stocks.
- Long-term wealth creation.
- To invest in securities of the Nifty Bank Index.
- Aims to achieve returns of the benchmark index subject to tracking error.
Investment Strategy of ICICI Prudential Nifty Bank Index Fund:
Nifty Bank Index represents the top 12 banks based on free-float market capitalization. This scheme invests in all the Nifty Bank Index stocks in the same weightage. The index will be rebalanced semi-annually.
The portfolio has been designed based on the recent and past performance of the banks. For the past 15 years, Nifty Bank TRI has outperformed both Nifty 50 and Nifty 500.
- The above-listed banks are the large-cap stocks of the Indian banking sector.
- Being the oldest Index, it tracks the capital market performance of banks in India.
- This index is the key factor to evaluate the growth of the Indian Economy.
Outlook on Banking Sector: Key Observations
Banking sector has the highest weightage in broader market indices like Nifty 500 and Nifty 50. Indian Fintech market is expected to reach INR 6.2 trillion by 2025. Demand for banking and its related sectors will be increased due to certain factors:
- Growing of disposable Income
- Increasing rate of the working population
Banks are possessing high net interest margins and low NPA (Non-Performing Assets) which indicates a healthy performance. Private Banks have a drastic improvement over the past 10 years. The notable factors for their growth are customer-centric mindset, technological superiority, and so on.
Pros of Investing inICICI Prudential Nifty Bank Index Fund:
- The fund is diversified among the top-performing banks in India.
- In recent times, the asset quality of banks is improvising due to various reforms.
- Investors seeking for allocation to banking sector with low expense ratio can apt for this Index fund.
- If the banking sector performs and delivers, then this fund can give you better returns.
- This fund is managed passively. So the expense ratios are expected to be low as compared to the actively managed mutual fund schemes.
- This fund is suitable for aggressive investors who are bulling on the banking sector.
- The portfolio of this fund will be highly transparent when compared to active mutual funds as it mirrors the banking index.
- This fund is free from fund manager bias and eliminates stock selection risk.
Cons of Investing inICICI Prudential Nifty Bank Index Fund:
- It is riskier for short-term Investors.
- This fund is not suitable for your core portfolio.
- Returns of the Index fund can’t be expected to beat the market.
- Being an index fund, it may underperform its index due to fees and expenses, trading costs, etc.
- As an Index fund, it is not flexible and dynamic when compared to active funds. During market crashes, this fund will neither be able to take any proactive step nor will be able to take any course corrective steps. Similarly, when there is a momentary market opportunity, this fund will not be able to capitalize on that.
- As this is a sectoral fund, this can add more volatility to your portfolio.
- Being a sectoral fund, this fund limits its exposure only to Banking sector. This brings concentration risk to your portfolio. A healthy diversification is not possible with this fund.
- If the banking sector underperforms, this fund will also underperform.
- Based on the market outlook, the fund manager cannot change the allocation to other sectors dynamically. Even if the outlook for the banking sector becomes poor, the fund will continue to remain invested only in Banking stocks.
- As an Index fund, it blindly mirrors the index. This fund will never do any analysis on the underlying stocks and check the soundness of the company in which it is going to invest.
Final takeaway of ICICI Prudential Nifty Bank Index Fund:
- First time investors and conservative investors should avoid this fund because of its aggressive nature due to less diversification.
- As ICICI Prudential Nifty Bank Index Fund is an NFO, we need to wait and check its expense ratio and its capability to maintain low tracking error. There are existing Nifty Bank Index Funds with less expense ratio and less tracking error. It’s better to wait till they create a track record.
- This fund is not suitable for investors looking for market beating returns or dynamic fund management.
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