Nifty Bank surges 10% in 1 month to hit 52-week high level. Time to shift focus towards banking sector?

With Nifty Bank surging nearly 10% in one month to hit a 52-week high level of 55,961 on Tuesday, market experts recommends that though Nifty Bank index funds and ETFs are an easy way to invest in some of India’s biggest banks, both private and public but as they focus only on the banking sector, they can be affected by things like new regulations or changes in the economy.

“Nifty Bank index funds and ETFs are an easy way to invest in some of India’s biggest banks, both private and public. They give you a mix of different banking stocks, which helps spread out risk within the sector. These funds are also low-cost, easy to buy and sell, and more transparent than many other investment options,” said Om Ghawalkar, Market Analyst, Share.Market.

“However, because they focus only on the banking sector, they can be affected by things like new regulations or changes in the economy. They’re a good fit for investors who are okay with some risk and plan to invest for the medium to long term,” he further explained.

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Another expert mentions that these funds are sectoral funds and are suitable for aggressive investors who are comfortable with the risk associated with higher returns.

“Nifty bank benchmarked funds are sectoral funds and are suitable for aggressive portfolios where clients are comfortable with the commensurate risks associated with higher returns,” said Manish Kothari, Co-founder, ZFunds.

In the last three months, the Nifty Bank index has gone up by 14.21% and in the last six months it has gained 8.56%. The index surged nearly 16.11% in the last one year. In the last three and five years, it gained 54.38% and 182.45% respectively.

Ghawalkar attributes this rally to multiple positive factors such as strong Q4 earnings from major players, interest rate cuts by the RBI, controlled inflation, and improved net interest margins. “Additionally, lower slippages and stable asset quality are being viewed favorably by investors. The sector also received a boost from the renewed interest of foreign institutional investors (FIIs) in Indian equities,” he added.

India’s inflation at five-year low, government expenditure as per budget estimates, and bank NPAs at cyclical low are some positive factors according to Kothari which have contributed to this rally. “These indicators have set the stage for further interest rate cuts. Bank stocks have rallied in anticipation of the ensuing low interest rate environment and an uptick in consumer demand for credit,” he further added.

Nifty Private Bank and Nifty PSU Bank indices have rallied upto 10.26% and 9.84% respectively in the last one month. In the last three months, these indices have gone up by 16.08% and 7.85% respectively.

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There are around 21 funds benchmarked against Nifty Bank - TRI index. Six funds are benchmarked against Nifty PSU Bank - TRI and seven funds are benchmarked against Nifty Private Bank - TRI, against which mutual funds are benchmarked. TRI is the Total Return Index.

In the last one month, these funds have offered upto 9.86% return with SBI Nifty Private Bank ETF being the topper. Kotak Nifty PSU Bank ETF gave the lowest return of around 8.96% in the last one month.

While recommending an allocation of upto 5% in the sectoral funds like these, Kothari mentions that sectoral funds are part of the investor’s tactical allocation and they should have a defined exit strategy when they invest in sectoral funds. “Contingent on regulatory developments and sectoral growth, clients with aggressive portfolios can allocate for the next 18/24 months in Nifty Bank,” he added.

Ghawalkar advises not to allocate more than 10%–20% of your portfolio to a single sector and he further cautions that though the banking sector currently appears attractive to many investors, but it's important to keep in mind its cyclical nature as any changes in RBI policies or broader macroeconomic conditions could significantly impact the sector’s performance.

“A significant portion of this gain, around 12%, came after the announcement of U.S. tariffs by President Trump. The index has also shown strength with multiple gap-up openings in recent trading sessions. Additionally, the RBI’s recent rate cut has further boosted sentiment in the banking sector, making borrowing cheaper and supporting credit growth,” he added.

One should always invest based on their risk appetite, investment horizon, and goals.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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