As a strong play on the broader domestic economic revival, one key segment is generally expected to have a favourable run. The banking and financial services sector may offer opportunities to gain from the growth path that the country is likely to take. Along with infrastructure, the BFSI (banking, financial services and insurance) segment would be a key component that would fuel GDP growth.

A whole host of sub-segments come under the BFSI sector – public and private sector banks, NBFCs insurers, asset and wealth management companies, fintechs, brokerages and insurtechs, among others.

In this regard, Quant Mutual is coming out with a new BFSI fund that will seek to invest in these companies.

Given the cyclical nature of the theme itself, it is important to time the entry and exit well. Most of the funds tracking the theme haven’t been able to deliver well over a medium to long-term period.

Here is what you must know before investing in the theme and the present NFO (new fund offer).

A theme on the rise

For the better part of the previous decade (2010-20), banks (and more so public sector banks) were in particularly bad shape. With burgeoning non-performing assets, higher provisions, the challenges with mergers & acquisitions, and the like. But things have improved over the past three years, even in a post-Covid environment. FY23 has been one of the best years for banks. Data from BCG and RBI indicate that for 9MFY23, credit and deposit growth are in double digits, net interest income has surged by over 21 per cent, NPAs have fallen by 200 basis points and return on assets are up – all year on year. NBFCs and small finance banks, too, seem to have found their feet after the weathering of the Covid impact.

In the meanwhile, other segments in BFSI have been doing well. Retail investors are ploughing more than ₹13,000 crore every month in mutual funds via the SIP route. PMS and AIF assets have zoomed ahead. As much as 40 per cent of the world’s digital transactions are made in India. In May this year, 900 crore UPI transactions were made worth ₹14 lakh crore. There are around 2,100 fintechs operating in India.

Data from IBEF suggests that India’s insurance market is expected to reach $222 billion by 2026.

There are a small number of investable firms to play each of these segments, though there is limited depth in key areas, with very few listed companies.

Read: Edelweiss Multi Asset Allocation NFO: How is it different, should you invest?

Rolling returns: BFSI funds lag benchmark

There are 14 funds tracking the banking and financial services theme. Of these, ten have been around for more than five years and some even over ten years. On a point-to-point return basis, the returns for the last one and three-year periods are reasonable, thanks to the overall rally of some key segments such as public sector banks.

But by and large, these funds haven’t been able to beat the Nifty Financial Services TRI over five and ten years.

When rolling returns are taken, the picture is starker. Three-year rolling returns over 2013-2023 indicate that only the ICICI Prudential Banking and Financial Services fund has managed to do better than the Nifty Financial Services TRI, by a moderate margin.

Read: ITI Focused Equity Fund: Should you invest in the NFO?

What must investors do?

Being a theme that is linked to a host of factors – GDP growth, interest rates, inflation, macroeconomic, regulatory and geopolitical events – BFSI is a cyclical segment where returns can be lumpy. Entering and exiting funds with the right timing holds the key. With any outsized returns over short periods, investors must look to take profits or book out entirely if needed.

Given the modest track record of funds tracking the BFSI theme, only ICICI Prudential Banking and Financial Services Fund seems to have delivered reasonable performance.

Most of Quant’s funds, including thematic ones, have been among the best performers in their respective categories. Even so, it would be better for investors to wait for the Quant BFSI fund to develop a track record before investing in the scheme. The NFO closes on June 14