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As soon as foreign investors returned to the stock market especially in equity mutual funds in April, the portfolio of investors who had invested in these sectors started shining. Banking stocks, which were previously on the radar of domestic investors, have now become a preferred sector for foreign investors as well.

As per the Value Research data, under equity category, as of May 10, 2023, the sectoral banking funds have given returns of 26, 30% and 9% in last 1,3, and 5 years,  respectively.

Seeing high returns in sectoral banking funds, investors are getting attracted towards such schemes. So, first lets see what is a sectoral banking mutual fund? Sectoral bank mutual funds are those sector funds whose assets are primarily invested in Indian bank stocks. If the banking sector does well, these funds are expected to perform well and outperform the benchmark. Investing in these funds exposes you to a well-constructed portfolio of bank securities.

Tax provision
Now let’s see how are these taxed. Since these funds are an equity fund category, these are taxed like any other equity fund. Redeeming the shares within the one-year holding period provides short-term capital gains. Profits are taxed at 15% regardless of the income tax rate.

Long-term capital gains are incurred on selling fund units after a holding period of one year, and these gains are taxed at 20%. But what are the risks of investing in sectoral banking mutual funds. And what kind of investors should consider investing in such schemes. Since these funds focus on a single industry, these carry all the risks associated with that sector. Sectoral banking funds are better suited for investors who are willing to take higher risks in pursuit of above-average returns over a long period of time. Investing in these funds provides an opportunity to invest in banking shares that have the potential to deliver good returns.

Yearly returns
If we talk about returns, mutual funds like LIC, Tata, Nippon India, ICICI Prudential, IDBI, and UTI have provided returns in the range of 20 to 28 percent per year in one year. Similarly, such funds have given returns in the range of 24 to 36 percent over a period of 3 years.

According to founder of Investography, Shweta Jain, “Sectoral and thematic funds can be quite tricky as these are extremely volatile and highly risky. Recent performance might be tempting, but it’s important to stick to one’s goals and invest accordingly, or one might end up losing money.”

Not lets see what is the way forward for the banking sector. Market experts believe the Indian banks’ balance sheet has recovered substantially from its past. The global banking crisis will not have a major impact on India’s banking system.

According to a research report by LKP Securities, the operating environment of Indian Banks is likely to stay healthy for FY24 estimates. This may translate into stable Return on Asset.

So, overall, stock market experts have given positive outlook for banking sector outlook,
However, Money9 suggests that only investors with a high-risk appetite should invest in such equity funds.

Further, the help of a financial advisor is also recommended to understand your risk appetite better.

(Disclaimer: Stocks recommendations by experts or brokerages are their own and not those of the website or its management. Money9.com advises readers to check with certified experts before taking any investment decisions.)