NFO of ICICI Prudential Nifty Financial Services Ex-Bank ETF is open: Should you invest?

ICICI Prudential Mutual Fund launched the new fund offer of ICICI Prudential Nifty Financial Services Ex-Bank ETF (IPNFB) on November 16.
There are many funds dedicated to banking and financial services. Over the past year, banking sector funds have returned 6.98 percent, next only to PSU funds, according to Value Research. Does that make IPNFB worthy of investment?

What’s on offer?

IPNFB is an exchange traded fund (ETF) that tracks Nifty Financial Services Ex-Bank which comprises 30 financial sector companies, excluding banks. The index will be rebalanced twice a year. Allocation to individual stocks is capped at 25 percent during rebalancing. This is a passively managed fund that will mimic the index by purchasing stocks in the same proportion as they are in the index.

What works?

The underlying index comprises shares of housing finance companies, non-banking finance companies, holding companies, asset managers, insurance companies, brokerages, exchanges and new-age tech companies. These are high-growth segments in an expanding economy.

“There is increasing participation from all parts of society in credit, investments and insurance and as a result, the sector is poised to witness an unprecedented boom,” said Chintan Haria, head product & strategy, ICICI Prudential Mutual Fund. “Amid the digital revolution, financial services companies are adapting to the change faster. The sector is on the rise and the road thus far has been paved by various reforms, FDI policy relaxation, tax exemptions, etc., which will further encourage the industry to spend on expansion.”

The index offers exposure to various financial services except banks. Banks typically get large allocations in most other large-cap diversified equity funds as well as banking sector funds.

The top five constituents of the index are Housing Development Finance Corporation (26.33 percent), Bajaj Finance (18.44 percent), Bajaj Finserv (9.9 percent), SBI Life Insurance (5.52 percent) and HDFC Life Insurance (4.95 percent).

“This scheme can be a good proxy play on financialisation of savings through the cost-effective ETF route,” said Abhay Mathure, a Mumbai-based mutual fund distributor. “Exposure to services such as credit cards, asset management, insurance and depository services can be rewarding in the long term.”

What doesn’t work?

This being an ETF, units will be listed on the stock exchanges. The secondary market liquidity needs to be watched. As the scheme invests in shares of companies in a single sector, like any other sector fund, it comes with concentration risk.

“There are many segments in the financials space and each company differs from the other in terms of nature of business, quality of business and addressable market,” said Arun Kumar, head-research at FundsIndia.com. “Investors keen to take exposure to the financial services sector should go through an actively managed fund with a broad mandate to invest in financials.”

What should you do?

Banking sector funds are in a crowded space. There are 36 schemes with assets under management worth Rs 55,203 crore invested in shares of financial sector companies, as per Value Research on October 31. Some of these are actively managed. Among the passively managed funds, Bank Nifty, Nifty PSU Bank, Nifty Private Bank and Nifty Financial Services are the underlying indices.

In addition, financials being the largest sector in India, most diversified equity funds allocate money to these shares. Flexi-cap schemes on an average have allocated 28.66 percent of the money to shares of financial sector companies.

If you are new and have started investing in diversified equity funds, then you won’t miss much if you skip investments in IPNFB.

This scheme may work for sophisticated investors who have a view on the financial services sector and want to go beyond its largest component – banks. Such investors if intend to avoid fund manager risk and focus on low costs may consider investments in this scheme.

The NFO closes on November 25.