Investing in the BankNifty is better than investing in the Nifty

Saurabh Mukherjea and his Team at Marcellus Investment Managers have written an article arguing that investing in Indian Financial Services stocks is highly rewarding for long term investors not only in terms of absolute returns but also in terms of risk adjusted returns.

It is pointed out that the data over the past two decades shows that:

(i) the Bank Nifty has delivered far higher absolute returns than the Nifty (23% vs 14%);

(ii) Investors in Financial Services stocks are more than compensated for higher volatility as the Bank Nifty has delivered over 60% higher returns per unit of risk (Sharpe Ratio of the Bank Nifty over the past two decades is 0.45 versus 0.27 for the Nifty);

(iii) high quality Financial Services stocks have delivered better risk adjusted returns than high quality non-Financial stocks across all time periods; and

(iv) high quality Financial Services stocks such as HDFC Bank and Kotak Bank have delivered positive returns in one out of every two market crashes even when the Bank Nifty has delivered negative returns.

It is also stated that Bank Nifty has outperformed the Nifty by a massive 9% per annum over the past twenty years and that the risk adjusted returns of the Bank Nifty are over 60% higher than the Nifty

The fear amongst investors that investing in Financial Services stocks is riskier than investing in other sectors is debunked by pointing out that the real volatility of Financial stocks is not very different from the volatility of the broader index:

It is a fact that the Bank Nifty recovers from market crashes sooner than the Nifty and that high-quality lenders have historically always delivered better risk adjusted returns than high quality non-Financial companies

After a detailed study, Marcellus has concluded that high quality Financial Services stocks a must have for all investors looking to compound their wealth over the long term.

They have rightly described Indian Financials as "A compounding miracle hiding in plain sight".

This view is corroborated by the views of other experts who pointed out that since inception from 2000, the BankNifty has returned nearly 4.07 times more than the Nifty. While the BankNIFTY has gained 2581.47%, NIFTY has gained 638.68% over its lifetime from the time it was introduced.





Is Bank BEES ETF a good investment?

Taking a cue from Saurabh Mukherjea and Team Marcellus, one way to invest in Bank stocks is through an ETF such as the Nippon India ETF Bank BeES.

The Bank Bees is a Bank ETF fund of Goldman Sachs and the objective of the fund is to correspond the total returns of the Bank Nifty Index. The Bank Bees ETF fund holds all of the Bank Nifty stocks in the similar proportion as they are in the Bank Nifty Index

What about a Mutual Fund scheme dedicated to Banks and NBFCs (i.e. Financial Services)?

One of the drawbacks of investing in the BankNifty is that one is confined to the Banking stocks. There are no NBFCs in the BankNifty.

The ideal solution is to invest in a sectoral mutual fund scheme such as the SBI Banking & Financial Services Fund.

This Fund has a judicious mix of Banks, NBFCs, insurance and other financial services stocks in its portfolio

The latest allocation Break-up by Holdings of the SBI Banking & Financial Services Fund is as follows:

HDFC Bank Ltd.26.5%
ICICI Bank Ltd.13.15%
Kotak Mahindra Bank Ltd.10.83%
Axis Bank Ltd.9.1%
State Bank of India5.55%
ICICI Lombard General Insurance Comapny Limited4.49%
Cholamandalam Investment & Finance Co. Ltd.2.79%
Muthoot Finance Ltd.2.72%
ICICI Prudential Life Insurance Company Ltd.2.36%
Mahindra & Mahindra Financial Services Ltd.2.32%
Can Fin Homes Ltd.1.92%
Catholic Syrian Bank Ltd.1.8%
Federal Bank Ltd.1.79%
City Union Bank Ltd.1.67%
HDFC Asset Management Company Ltd.1.66%
ICICI Securities Ltd.1.46%
Central Depository Services (India) Ltd.1.45%
HDFC Standard Life Insurance Company Ltd.1.24%
Housing Development Finance Corpn. Ltd.0.62%
Computer Age Management Services Ltd.0.57%