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  • Banking Sector Mutual Funds

Best Banking and Financial Sector Mutual Funds

Banking Sector Mutual Funds invest in stocks of banks & other financial institutions with an objective to generate profits for investors.

Best Banking Sector Mutual Funds to Invest in 2024

Fund NameScripbox Opinion
Till Date CAGR
DSP ELSS Tax Saver Fund (G)
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What are Banking Sector Mutual Funds in India?

Banking Sector mutual funds primarily invest in equity and equity-related instruments of core banks and other financial institutions with the objective of generating profits for the investor. It is a sector-based mutual fund that uses a diversified strategy to invest in core banking companies. The fundamental purpose of introducing mutual funds in the Banking and Finance Sector is to boost investment in this sector of the economy.

Banking sector mutual funds invest across the following two industries:

  • Banking industry: The banking industry includes institutions that are solely engaged in fundamental banking activities such as retail banking, current account, savings account, loans, etc.
  • Financial Industry: The financial sector’s principal goal is to provide credit to individuals, institutions, and organisations as a whole. This sector is included in mutual funds for the Banking and Finance Industry since it is similar to the banking sector but does not engage in fundamental banking activities. This sector aids in the mobilisation of liquidity in the money market in order to enable economic growth.

Best Banking and Financial Services Funds to Invest 2024

Fund NameReturns Since Inception Expense Ratio
HDFC Banking & Financial Services Fund12.20%2.01
SBI Banking and Financial Services Fund11.40%1.94
ICICI Banking and Financial Services Fund15.70%1.93
Mirae Asset Banking and Financial Services Fund6.80%2.31
TATA Banking and Financial Services Fund13.10%0.95

Advantages of Investing in Banking Sector Mutual Funds

Following are the key advantages of investing in banking sector mutual funds:

  • RBI Governs the Banking and Financial Sector: The Reserve Bank of India (RBI) regulates all financial operations. RBI is a government-owned corporation that constantly establishes policies with the welfare of people and companies in mind. Since RBI governs these companies, there are low chances of unethical practices.
  • Returns: The banking sector is like the backbone of the economy. The sector has the potential to offer a high growth rate.
  • Exposure to Leading Companies in the Banking Sector: Banking institutions are part of the large-cap companies, and they are often the best performers in their industry. Therefore, the banking sector mutual fund will give you access to all the leading companies in the industry.
  • Long-term Investment: Banking sector funds are equity schemes that have the potential to generate significant returns in the long term. Therefore, banking sector mutual funds are suitable for long term financial goals.

Who Should Invest in Banking Sector Mutual Funds?

Banking sector mutual funds are professionally managed funds that invest in stocks from the banking industry. The fund managers are only allowed to invest in banking and financial sector stocks. These funds are appropriate for investors with a high-risk tolerance level. Since these are pure equity schemes, they are highly risky. At the same time, they can generate substantial returns in favourable market situations.

On the other hand, if the banking sector witnesses a downturn, the stocks will lose value. Therefore, invest in banking sector funds only if you understand the sector dynamics and are an experienced investor. Furthermore, even if you are well aware of the market and its dynamics, a more than 10% portfolio exposure in banking sector funds is not advisable.

How to Select Banking Sector Mutual Funds for Investment?

Banking and financial institutions are always on the go to offer best-in-class experience and service for their clients. Though the future looks bright for the banking industry with the backing of the RBI and government. Following are some parameters that will help you select the best banking sector mutual fund for investment:

Industry Outlook

Increased infrastructure spending, faster project delivery, and the continuation of reforms are likely to provide the banking industry with a boost. All of these elements point to a strong future for India’s banking sector, as companies with rapid expansion plans will look to banks for financing.

Additionally, technological advancements have pushed mobile and online banking to the forefront. The banking industry is putting a greater emphasis on offering better services to customers and modernizing its digital infrastructure. This is to improve the overall customer experience and have a competitive advantage.

India’s digital lending is expected to reach USD 1 trillion by FY23. Furthermore, the Indian fintech sector is estimated to reach INR 6.2 trillion by 2025.

Historical Performance

A banking sector fund’s past performance does not guarantee future results. Analysing the fund’s returns in comparison to its benchmark and peers, on the other hand, can assist you in evaluating its performance. Funds with a track record of consistently outperforming their benchmark and peers are good investing options. Furthermore, evaluating historical returns will allow you to better understand the fund manager’s and the fund’s performance over time.

Investment Objective

Banking sector mutual funds aim to develop long-term wealth by taking advantage of the banking industry’s long-term growth potential. The fund manager picks promising stocks only after a thorough analysis of the company and its prospects. To minimize risk, the fund’s portfolio is kept as broad as possible. Thus, you should always identify well-diversified funds across the sector.

Investment Horizon

As the risk associated with banking sector funds is high, you must have a long-term investing horizon. By holding your investments for a longer period of time, the risks averages to a great extent. Only invest in these funds if you have a long-term investment horizon.


Since banking sector funds are highly risky, they are suitable for aggressive investors. Thus, invest in the sector if you have high-risk tolerance levels. To limit the associated risks to a large extent, a long-term investment horizon is a must. Investing in these funds allows you to gain exposure to a portfolio of the best-performing banking and financial sector stocks. Moreover, keeping your investments below 10% across sector mutual funds is advisable. 

Asset Allocation

Since banking funds are sector funds, their portfolio heavily invests across the banking and financial services industry, making it a high-risk investment. These funds heavily invest across the banks, NBFCs and other financial institutions. As a result, the portfolio will have high exposure to a single sector. Not all stocks perform well all the time. Therefore, it is a must to ensure the fund’s portfolio is well diversified.

The Banking industry is performing well right now and has good growth prospects. However, that doesn’t ensure the growth cycle is permanent. Markets, businesses and industries move in cycles. Thus, if you are an investor who has a thorough understanding of the banking and financial services sector and is willing to take on the volatility, you may consider investing in banking sector mutual funds.

Banking Sector Outlook in India

The Indian banking system comprises 12 public sector banks, 22 private sector banks, 46 foreign banks, 11 small finance banks, 56 regional rural banks, 1485 urban cooperative banks and 96,000 rural cooperative banks and also cooperative credit institutions.

Despite global turmoil, India’s banking industry has historically been among the most stable in the world. The government has made a concerted effort to promote financial inclusion through a variety of measures aimed at bringing the country’s underbanked population into the banking system.

The government-mandated an open API policy known as India Stack as part of the Digital India initiative, allowing third-party providers access to proprietary software for five key programmes: Aadhaar, e–signing, e–KYC, UPI and privacy-protected data sharing.

As of 2020, Indian banks’ capital adequacy remained above regulatory limits, with the RBI lowering the leverage ratio allowing banks to increase lending.

Innovative banking concepts such as payments and small finance banks have lately been introduced in the Indian banking market. The RBI’s new policies focus on assisting the domestic banking industry’s reform.

The need for financial products has increased as the corporate environment has become more dynamic. Banks are adopting novel financial products and enhanced risk management techniques to gain market share.

Due to the government’s ongoing efforts to promote banking technology and expand into unbanked and metropolitan areas, access to the banking system has improved over time. The Jan Dhan Yojana is a financial inclusion programme established by the Ministry of Finance in 2014. The program aims to increase affordable access to financial services such as bank accounts, credit, insurance, and pensions in all sections of India.

Indian Central Bank and Singapore banks have announced plans to integrate their digital payment systems by July 2022, allowing for quick and low-cost financial transactions.

Source: IBEF and InvestIndia

Growth Drivers

  • Increasing Demand: An increase in the working population and disposable income, as well as increasing consumption and better credit availability, have all contributed to a rise in demand.
  • Government Initiatives: The government has aggressively promoted banking technology and tapped the unbanked and non-metro regions.
  • Rural Banking: Due to higher disposable income levels among rural households, there is a lot of demand for banking products.
  • Higher Credits: Increasing credit in the housing industry to low and middle-income sectors.
  • Loans: There has been an increase in demand for both corporate and retail loan books. For credit expansion, the main sectoral drivers have been services, real estate, consumer durables, and agriculture.