At this juncture, it makes sense for an average investor to invest in the banking sector. Here’s why.
Investing in the banking sector is like investing in the whole economy. In this article I intend to explain why one should invest in the banking sector and how to go about it.
Why invest in banking sector?
There are many reasons to justify investment in the banking sector.
Banking is the vein of an economy. Growth of banking and economy is interdependent. As the Indian economy is expected to do better than other economies in future, the banking sector will also perform in line with the economy. With various restrictions on cash transactions under the Indian tax laws, more and more transactions are happening through banking channels. The decision of the government, in the budget, to introduce the core banking system in the Indian post offices will also give a major boost to the banking sector as millions of post office account holders will be able to transact online across the banking sector. With Non-Performing Assets (NPA) levels coming down after clean up in the banking sector, this sector is expected to perform better in future is also one of the reasons for taking exposure to this sector. So at this juncture, it makes sense for an average investor to invest in the banking sector.
Why invest through an Index Fund in equity?
Direct equity investing is a full time job and requires thorough knowledge and expertise which each one of us do not have. It also requires picking up the right company for making investment as well as continuous monitoring of the investee company. So it makes sense for an individual investor to invest through either an index fund or diversified mutual fund scheme.
An index fund like other open ended equity mutual fund schemes offers you the convenience of investing either lump sum or in a systematic manner through Systematic Investment Plan (SIP) and Systematic Withdrawal Plan (SWP). Since an index fund imitates the underlying index, constituents of which are reviewed periodically to weed out the non performing stock in it, it makes more sense for an average investor to invest through an index fund. Since an index fund gives you the opportunity to invest in many companies at the same time with a very small amount like five thousand rupees for one-time investment and 500-1000 through SIP and SWP, it is one more reason for you to go for an index fund than investing directly in many companies. Investing in any mutual fund scheme does not require you to have a demat account and thus is convenient as well.
Additionally, over the last few years and specifically after categorisation of mutual funds by SEBI with attached requirement to invest minimum of their corpus in specific segment of the market capitalisation and higher expenses ratio, a significant number of active mutual fund schemes are not able beat their benchmark, so it makes sense for you to invest through index funds as they have very low expenses ratio.
What is Nifty Bank Index and how to go about investing in it?
The Nifty Bank Index is a market index constructed by National Stock Exchange (NSE), the leading stock exchange of the country. It comprises of 12 and top capitalised and liquid banks, selected from private and public Sector. The index includes leaders in private sectors like HDFC Bank and ICICI Bank as well as State Bank of India of the Public Sector. In addition to the traditional banks it is also represented by the new age banks like IDFC First Bank and AU small Finance Bank. Since the index represents top banks of the country, one can directly invest in the Nifty Bank Index to take exposure to banking sectors with the lower cost and lesser risk. The constituents of the index are reviewed half yearly to weed out non performers and thus eliminating the task of an investor to review individual stocks. ICICI Mutual Fund is offering you the chance to invest in Nifty Bank Index through its Nifty Bank Fund index which is open till 24th February, 2022.
Taxation of Nifty Bank Index Fund
Since the Nifty Index Fund will imitate the Nifty Banking Fund it qualifies as an equity oriented scheme and thus investment in it is eligible for concessional tax treatment under the income tax laws on the profits made. Profits made on redemption within 12 months on investment in ICICI Bank Index Fund is treated as long term capital gains and will be taxed at a flat rate of only 15%. In case you redeem your investment after 12 months, there is no tax liability on initial long term capital gains of one lakh rupee and the balance is also taxed at flat concessional rate of 10%. The initial long term capital gains of one lakh rupee will include all long term capital gains of direct listed shares as well as all equity oriented schemes.
The Nifty Bank Index has outperformed the Nifty 50 as well as Nifty 500 Indexes in the last 15 years, which gives you one more reason to invest in the banking sector.
(The author is a tax and investment expert, and can be reached at [email protected])
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