Why Banking and Financial Services Funds Are a Smart Long-Term Investment?

Are you looking for a smart way to grow your money over time?

India's financial ecosystem has seen dramatic shifts in the past decade. Yet, banking and financial services (BFS) funds remain one of the most trusted investment choices for long-term wealth building. In 2024, these funds posted average returns of 11.28%. 

While it may seem underwhelming, many experienced investors understand that real growth in BFS funds doesn’t come from one-off market moves. It’s the steady climb over the years.

Why Financial Sector Funds Deserve Attention?

Financial services sit at the centre of every economy. Whether a farmer applies for a crop loan or a startup needs funding, banks and NBFCs step in. So naturally, mutual funds that invest in banking and finance stocks tend to reflect economic growth patterns.

But there’s more. In India, increasing financial literacy, UPI adoption, and formal credit access have strengthened this sector. 

Investors who stayed invested through multiple cycles have seen steady compounding.

Let’s understand this:

Now compare that with a general large-cap fund which gave just 11%-12% simultaneously. This gap matters when you are investing for 10 years or more.

Strong Historical Patterns Back Growth

Long-term data shows BFS funds tend to outperform broader equity indices when the economy is in a healthy phase. Look at the 10-year returns across market cycles:

Even during short-term underperformance, experienced investors do not exit. That’s the key difference. For example, in 2020, during the pandemic, BFS funds dropped, but by late 2021, they had recovered sharply.

These funds usually include top Indian banks like HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank, and NBFCs like Bajaj Finance. Since these are leaders in credit growth, they get back on track faster than smaller sectors.

Moreover, the digital wave in banking is helping in lowering operational costs and improving margins. That’s why mutual funds remain bullish on BFS stocks.

Regular SIPs Make The Real Difference

One of the easiest ways to build wealth with BFS funds is through Systematic Investment Plans (SIPs). Let’s look at this through Indian lens.

Suppose you start a monthly SIP of ₹5,000 in a BFS fund with an average return of 14% per year:

Over 15 years, you turn ₹9,00,000 into more than ₹25,00,000. That’s the real game. Discipline and patience.

Now think of this on a larger scale. What if someone puts ₹25,000 monthly? Over 15 years, that’s a wealth of ₹1.27 crore from just ₹45,00,000 invested.

It’s compound interest working silently.

Sector Fundamentals Look Strong

Let’s move to what’s coming next. 

Indian banks are set for stronger credit growth. In FY 25–26, big banks like SBI are aiming for loan growth around 12%-13%. Combine that with falling NPAs and higher retail lending, and you get stronger balance sheets.

Also, the RBI has pushed for digital banking norms. This opens up space for fintech players and traditional banks to offer more personal finance products. BFS mutual funds hold a mix of such companies.

Another supporting factor is CASA deposits. Though they dropped a bit last year, they are expected to stabilise with lower interest rates.

All these things strengthen the investment case for BFS funds. These numbers are signals, not guesses.

How to Pick The Right Fund?

Now not every fund in this category will suit your goals. But a few simple filters can help.

1. Past Performance – At least 5 years of track record.
2. Expense Ratio – Lower the better. Anything below 1% is good.
3. Fund Manager Tenure – Look for stable management.
4. AUM Size – Avoid very small AUMs (below ₹500 crore).

Also, some funds are more focused on lending institutions, while others also include insurance and fintech players. Read the portfolio allocation once.

And don’t invest lump sums unless you understand the timing. For most people, SIPs work better.

Top BFS Funds to Watch

Conclusion

Let’s be honest. Every sector fund has risk. BFS is not immune. During financial crises or rate hikes, these funds fall sharply. In 2008 and 2020, BFS funds saw 30%+ drawdowns.

Also, banking stocks are sensitive to RBI policy changes. If interest rates go up, margins shrink. But remember, long-term performance often recovers quickly.

So diversify. Don’t put more than 15%-20% of your portfolio in BFS funds. That’s a thumb rule.

Also, avoid chasing past returns. Just because one fund gave 35% last year doesn’t mean it will again.

FAQs

1. What are BFS mutual funds in India? 

These are mutual funds that invest mostly in banking, NBFCs, insurance, and other financial services companies listed on Indian exchanges.

2. Are BFS funds risky for beginners? 

They can be, if you go all-in. But if you invest through SIP and limit exposure to 15%, it’s manageable. Always balance it with large-cap funds.

3. Can I invest lump sum in BFS funds? 

Only if the market is down and you are ready to hold for at least 5–7 years. Otherwise, stagger your entry.

4. Are returns from BFS funds taxed? 

Yes. If held more than 1 year, gains over ₹1,00,000 are taxed at 10%. For under 1 year, 15% short-term capital gains tax applies.

5. Which BFS fund is best in 2025? 

There is no single “best.” Look at SBI BFS Fund, Nippon India BFS Fund, and Tata BFS Fund. Choose as per your risk profile.

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