Banking and Financial Services Sector in India: Things to Know

Banking & Finance Sector

Banking and Financial Services Sector

The banking and financial service sector plays a pivotal role in strengthening India’s economy. With India’s increased growth and digitization, this sector is developing rapidly to address the needs of every citizen.

The banking and financial sector in India involves institutions like banks, mutual fund houses, financial advisors, brokerages and insurance companies, among other participants. Keep reading for further details about this evolving sector among Indian investors.

About Banking and Financial Services in India

The banking, financial service and insurance (BFSI) sector is the backbone of a country’s economy as it helps regulate and control the nation’s cash flow. A smooth and efficiently running banking system also helps in a country’s economic growth.

In India, the banking and financial service industry is equipped with numerous public and private banks and rural and urban cooperative banks spread all over the country. Numerically speaking, the banking and Indian financial system encompasses 12 private sector banks, 56 regional rural banks, 22 private banks, 46 foreign banks, 96,000 rural cooperative banks and 1,485 urban cooperative banks.

The developing economy and industrial environment ensure a favorable ecosystem for the growth of this sector in days to come. This sector has undergone a drastic transformation in terms of the relationship between banking and financial institutions with generations of customers.

Throughout this transformative journey, regulatory bodies like the Securities and Exchange Board of India and the Reserve Bank of India played a crucial role. These bodies monitor and regulate the functioning of financial and non-financial institutions in India. By doing so, they ensure efficiency, accountability and transparency regarding the flow of cash in our country.

How to Invest in Banking and Financial Services in India?

To invest in banking and financial service sectors in India, you can opt for sectoral mutual funds that largely focus on this field. This type of mutual fund usually invests in equity and equity-related instruments of banking and other financial institutions.

With the growing demand for this sector, several fund houses and AMC are launching New Fund Offers (NFOs) that invest in banking and financial service sectors in India. For instance, Groww Mutual Fund (formally, IndiaBulls) is ready to launch an NFO, Groww BFSI Mutual Fund which will invest in stocks of the banking and financial service sector.

The NFO of this open-ended equity scheme will launch on January 17, 2024, and its subscription period will end on January 31, 2024.

Institutions Providing Banking and Financial Services in India

The institutions which fall under the banking and financial services sectors in India are as follows:

  • Mutual Funds

Mutual funds are run by Asset Management Companies (AMCs) offering professional and regulated services to retail investors. A mutual fund invests its money in different assets under its management mainly equity and debt-related instruments. This is a popular investment option for Indians to focus on capital growth along with lower risk, stable returns and tax benefits.

  • Banks

Talking of banking and financial service sectors in India, all kinds of banks are major players here. Today, banks offer a range of services using advanced technology to seamlessly meet customer demands for capital growth and the security of their finances. For depositors, banks offer savings accounts, current accounts, fixed deposits and recurring deposits. They also offer debit cards, credit cards, loans, insurance policies, etc.

  • Insurance

The Indian banking and financial service industry also involves insurance companies. These companies majorly offer products falling in the broad segments of life insurance and general insurance.

Some financial products belonging to the life insurance category are term life insurance, money-back insurance and ULIP plans among others. Whereas products belonging to the general insurance category include health insurance, vehicle insurance, home insurance, fire and travel insurance. Companies offering insurance products to customers are regulated and monitored by the Insurance Regulatory and Development Authority in India (IRDAI).

  • Wealth Management

Companies that offer exclusive wealth management services allow investors opportunities to invest their funds in different financial instruments. In addition, they provide accounting services, tax services, investment advisory services, etc., catered towards the client.

  • Stock Market

The stock market is a major segment that contributes to smooth cash flow across banking and financial sectors in India. This financial segment offers endless investment solutions to experienced and novice investors to focus on capital growth regardless of their risk appetite and investment horizon.

The stock market is a volatile place and investments are subject to market fluctuations. Therefore, investors must be well aware of their risk appetite and investment goals before investing.

What Is Passive Investing in Banking and Financial Services in India?

Regular equity funds might invest in a few stocks from the banking and financial service sectors in India to focus on portfolio diversification. However, certain sectoral equity funds invest solely in units of financial service-providing companies and banks. There are also several index funds focusing on the banking sector in India.

According to reports, in 3 out of the last 5 years, most active mutual funds investing in this sector could not beat NIFTY Financial Services TRI. As a result, experts suggest investors opt for passive investment in this sector with Index Funds or ETFs.

Advantages of Passive Investing in Banking and Financial Service Sectors in India

Here are a few advantages of passive investing in banking and financial service sectors in India that you might want to look into for a clearer idea.

  • Lower Cost of Investment

The total expense ratio for passive investments in the BFSI sector is comparatively lesser than active funds. Furthermore, the NAV for these mutual fund schemes are also lower. As a result, this magnifies the chances of better returns with low investments in the same underlying stocks.

  • Less Chance of Unsystematic Risks

Very often, fund managers find themselves over-burdened or under-burdened with certain stocks to generate alpha over the market index. Such instances introduce unsystematic risks. However, ETFs and index funds aim to copy the performance of the underlying asset’s index. This lowers the probability of unsystematic risks.

Reasons to Invest in Banking and Financial Service Sector in India

Take a look at the following reasons that make investment in the banking and financial services sector in India worthwhile.

  • Growth of Fintech Institutions

The banking and financial service sector in India foresees a strong scope of growth with market penetration and digitization of its services. Materializing this aim will help this sector offer better services to the rural market and the upcoming technology-reliant generation. Thus, investment towards this sector will help financial sectors work towards this goal ensuring the growth and development of fintech institutions.

  • Revive Corporate Profitability

Investment in banking and financial sectors will ensure liquidity in BFSI companies and help in building healthy balance sheets. This is a major initiative to revive capital profitability in several other sectors as well.

Consequently, institutions in other industries will have enough finances to repay debts and reduce the risk of becoming NPA for banks. This will finally help to achieve a sustainable environment for banks to run the economy.

Bottom Line

The banking and financial service sector in India is undergoing a phase of drastic shifts and changes. Analysts consider that increased investment penetration in banking and financial service sectors in India among the contributing factors to this growth.

If you are an interested investor in this field, consider knowing your financial goals and risk appetite to plan a well-informed strategy to invest in this sector.

About Sashi 534 Articles
Sashi Singh is content contributor and editor at IP. She has an amazing experience in content marketing from last many years. Read her contribution and leave comment.

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