Expert advice

Nov 21, 2016,09.24 IST

How to choose a banking fund for your portfolio?

Arnav Pandya

There are various variations of funds present in the market and investors have to take a close look at the exact details related to them before including it in their portfolio. The tendency of many people is to just go by the name of the fund and then make a decision but often this might not give the right picture and the investor would have to dig deeper to know exactly what they are taking an exposure to. This happens especially when there are names of funds that look similar. Here is a look at bank funds that are present and some ways in which they might be different from what one expected them to be.

Debt and equity

The first difference that a lot of people will witness with respect to banking funds is that some of them are equity oriented while others are debt oriented. This makes a big difference in terms of the exposure for the individual because the equity funds will include stocks from the banking sector and hence they would move in tandem with the changes in the prices of the stocks. This equity exposure has a higher amount of risk and there can also be a loss of capital in case things do not work out as expected. On the other hand the debt fund would focus on having holdings from bank issued debt in its portfolio and here the earnings for the fund would come from the interest earned on these holdings plus any capital gains that come from trading of the instruments. The investor needs to know the kind of risk that they can take and then decide on the type of fund because there should not be any confusion in this respect. The equity exposure can be especially worrying for someone who might be looking for a safe and steady investment and hence this needs some attention.

Type of holding

The nature of the fund would determine the holdings that are present in the portfolio of the fund. These are important because they will determine the kind of returns that come at the end of the day. If there is an equity oriented banking fund then the holding would comprise of equity shares of banks. One would need to look at the type of banks that have been included and the exposure that is given to them so whether these are large cap or mid cap banks and whether they belong to the private sector or the public sector. On the other hand when it comes to a debt oriented banking fund then the primary holding would be the certificates of deposits that are issued by the banks. Again the financial condition of the bank and the ability to service the payout would be the crucial factors.

Cost

The nature of the fund would thus determine the results that the investor can expect from the investment which is higher in case of the equity oriented bank fund. At the same time the risk is also higher in the equity oriented fund. There might not be much difference when it comes to the minimum amount that would have to be invested by the investor when they put money into the fund. However the expense ratio for the debt oriented fund would be far lower in absolute terms as compared to the equity fund which is also a normal thing. The cost for the investor in terms of the expense ratio would thus work out in this manner while they would need to watch for some exit load too in case the fund has imposed such a load.
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