The Indian banking sector has been under pressure due to a high volume of non-performing assets (NPAs) that surged in 2020 due to the adverse impact of the pandemic. However, the government’s support mitigated the risks in the banking and financial sector.
In order to strengthen the banking industry and to improve capital adequacy, ten public sector banks were merged into four with effect from April 1, 2020. The asset quality of banks is improving due to reforms that may lead to risk reduction and increased returns.
An increase in the working population and growing disposable income will raise the demand for banking and related services such as mobile banking, internet banking, and the extension of facilities at ATMs will improve the operational efficiency of banks. Moreover, RBI has announced the launch of its first global hackathon ‘HARBINGER 2021 – Innovation for Transformation’ with the theme ‘Smarter Digital Payments’.
As per the Union Budget for FY 2022-23, the government has also maintained support for the digital payment ecosystem. To ease lending, the government may encourage banks to specifically fund fintech and smaller NBFCs which are assisting to expand financial inclusion in the retail segment. The banking sector is an important component of the economy’s growth engine and it will be crucial in meeting budgetary objectives. This gives a positive outlook on the banking sector in the long run.
The investor sentiment has gained momentum towards the banking sector considering the growth potential. Investors seeking to invest in the most liquid and large Indian Banking stocks have an opportunity to invest in the Nifty Bank Index, as it measures the performance of the top 12 Indian banks. ICICI Prudential Mutual Fund has launched ICICI Prudential Nifty Bank Index Fund. It is an open-ended scheme replicating the Nifty Bank Index.
On the launch of this fund, Mr. Chintan Haria, Head- Product Development & Strategy at ICICI Prudential AMC said, “The Indian banking sector holds tremendous growth potential given the robust demand in their services, constant innovation in terms of improving operational efficiency along with improving business fundamentals owing to various reforms in this space. Also, banks and financial services form the highest weightage in broader market indices (Nifty 500 and Nifty 50) which emphasizes its importance in contributing to broader market trends.”
Table 1: Details of ICICI Prudential Nifty Bank Index Fund
| Type | An open-ended scheme replicating Nifty Bank Index. | Category | Index Fund |
| Investment Objective | The objective of the Scheme is to invest in companies whose securities are included in Nifty Bank Index and subject to tracking errors, to endeavour to achieve the returns of the above index. This would be done by investing in all the stocks comprising the Nifty Bank Index in the same weightage that they represent in Nifty Bank Index. However, there is no assurance or guarantee that the investment objective of the scheme shall be achieved. | ||
| Min. Investment | Rs 5,000 and in multiples of Re 1/- thereafter. Additional Purchase Rs 5,000/- and in multiples of Re. 1 thereafter. | Face Value | Rs 10/- per unit |
| SIP/SWP/STP | Available | ||
| Plans |
|
Options |
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| Entry Load | Not Applicable | Exit Load | Nil |
| Fund Manager | – Mr. Kayzad Eghlim – Mr. Nishit Patel |
Benchmark Index | Nifty Bank TRI |
| Issue Opens | February 10, 2022 | Issue Closes | February 24, 2022 |
(Source: Scheme Information Document)
The investment strategy for ICICI Prudential Nifty Bank Index Fund will be as follows:
ICICI Prudential Nifty Bank Index Fund will aim to invest in constituents of the Nifty Bank Index and exchange-traded derivatives of the Nifty Bank Index. The scheme endeavours to track returns parallel to the underlying index by investing in securities in similar proportion as under the Nifty Bank Index. The stocks comprising the Nifty Bank Index is periodically reviewed by NSE Indices.
The performance of the scheme may or may not be commensurate with the performance of the respective benchmark of the schemes on any given day or over any given period. Such variations are commonly referred to as tracking errors. The scheme intends to maintain a low tracking error by actively managing the portfolio in line with the index.
A particular stock may be dropped or new securities may be included as a constituent of the index. In such an event, the scheme will endeavour to reallocate its portfolio but the available investment/ disinvestment opportunities may not permit precise mirroring of the index immediately. The portfolio shall be rebalanced within 7 days to ensure adherence to the asset allocation norms of the scheme.
Similarly, in the event of a constituent stock being demerged/merged/delisted from the exchange, the Scheme will reallocate the portfolio and seek to minimize the variation from the index. Further, the Scheme intends to participate in securities lending as permitted under the regulations. The scheme may invest 0-5% of the Net Assets in Money Market instruments including TREPs and Units of Debt mutual funds to meet the liquidity and redemption requirements, subject to regulatory approvals.
Under normal circumstances, the asset allocation of the scheme will be as under:
Table 2: Asset Allocation for ICICI Prudential Nifty Bank Index Fund
| Instruments | Indicative Allocation (% of net assets) | Risk Profile | |
| Minimum | Maximum | High/Medium/Low | |
| Equity and Equity related securities of companies constituting the underlying index (NIFTY Bank Index) | 95 | 100 | Medium to High |
| Money Market instruments including TREPs* and Units of debt schemes# | 0 | 5 | Low to Medium |
*or similar instruments as may be permitted by RBI/ SEBI, subject to requisite approvals from SEBI / RBI, if needed.
#Excluding subscription money in transit before deployment/payout.
(Source: Scheme Information Document)
About the Benchmark
The NIFTY Bank Index comprises of the most liquid and large Indian Banking stocks. It provides investors and market intermediaries a benchmark that captures the capital market performance of the Indian banks. The Index comprises of top 12 Indian banks listed on the National Stock Exchange of India (NSE). NIFTY Bank Index is computed using free-float market capitalization method.
Private Banks have the highest weightage in Nifty Bank Index. The Market Capitalization of private banks has seen a quantum jump in the last 10 years on account of their high efficiency, a customer-centric mindset, technological superiority, and appropriate risk management.
Here’s the list of the top 10 constituents by weightage under the index as of January 31, 2022:
(Source: Nifty Bank Index Factsheet as of January 31, 2022)
Note that the Index is re-balanced on a semi-annual basis i.e., January and July.
Who will manage ICICI Prudential Nifty Bank Index Fund?
Mr. Kayzad Eghlim and Mr. Nishit Patel will be the designated fund managers for this scheme.
Mr. Kayzad Eghlim has more than 30 years of experience in financial services and he holds an MBA, M. Com, and B. Com degree. Before joining ICICI Pru AMC, he was associated with IDFC Investment Advisors Ltd. as Dealer – Equities; Prime Securities as a Manager; Canbank Mutual Fund (IS Himalayan Fund) as a Fund Manager; and Canbank Mutual Fund as Equity Dealer assisting the Fund Manager. He has worked with the Primary Market Department (IPO) at the beginning of his career.
At ICICI Pru AMC, Mr Kayzad currently manages ICICI Prudential Equity – Arbitrage Fund, ICICI Prudential Nifty 100 ETF, ICICI Prudential Nifty Next 50 Index Fund, ICICI Prudential Nifty ETF, ICICI Prudential NV20 ETF, ICICI Prudential Sensex ETF, ICICI Prudential Nifty Index Fund, ICICI Prudential Equity Savings Fund, ICICI Prudential Nifty Low Vol 30 ETF, BHARAT 22 ETF, ICICI Prudential S&P BSE 500 ETF, ICICI Prudential Nifty Next 50 ETF, ICICI Prudential Bharat 22 FOF, ICICI Prudential Bank ETF, ICICI Prudential Midcap Select ETF, ICICI Prudential Midcap 150 ETF, ICICI Prudential Alpha Low Vol 30 ETF, ICICI Prudential IT ETF,ICICI Prudential Nifty Low Vol 30 ETF, ICICI Prudential Healthcare ETF, ICICI Prudential FMCG ETF, ICICI Prudential Consumption ETF, ICICI Prudential Smallcap Index Fund, ICICI Prudential Private Banks ETF, ICICI Prudential Silver ETF Fund of Fund and ICICI Prudential Nifty Auto ETF.
Mr Nishit Patel joined ICICI Prudential Asset Management Company Limited in November 2018 and was working under ETF Business. He is a Chartered Accountant and B. Com graduate. At ICICI Pru AMC, Mr Patel currently manages ICICI Prudential Midcap Select ETF, ICICI Prudential Nifty 100 ETF, ICICI Prudential Nifty Next 50 Index Fund, ICICI Prudential Nifty ETF, ICICI Prudential NV20 ETF, ICICI Prudential Sensex Index Fund, ICICI Prudential Nifty Index Fund, ICICI Prudential Regular Gold Savings Fund (FOF), ICICI Prudential Gold ETF, ICICI Prudential Sensex ETF, ICICI Prudential S&P BSE 500 ETF, ICICI Prudential BHARAT 22 FOF, ICICI Prudential Nifty Next 50 ETF, ICICI Prudential Bank ETF, ICICI Prudential Private Banks ETF, ICICI Prudential Midcap 150 ETF, ICICI Prudential Alpha Low Vol 30 ETF, BHARAT 22 ETF, ICICI Prudential IT ETF, ICICI Prudential Nifty Low Vol 30 ETF, ICICI Prudential FMCG ETF, ICICI Prudential Healthcare ETF, ICICI Prudential Consumption ETF, ICICI Prudential Smallcap Index Fund, ICICI Prudential Silver ETF Fund of Fund and ICICI Prudential Nifty Auto ETF.
Fund Outlook – ICICI Prudential Nifty Bank Index Fund
ICICI Prudential Nifty Bank Index Fund aims to replicate the performance of the Nifty Bank Index by investing in its constituents in similar proportion, subject to tracking errors. The underlying index represents the 12 most liquid and large capitalised stocks from the banking sector, out of which 10 are private banks and 2 are PSU banks.
The scheme allows investors to invest in a benchmark that captures the capital market performance of Indian Banks. It provides investors an opportunity to invest in the biggest banks of the country and participate in India’s growth story. The fortune of this scheme will be closely linked to how the Nifty Bank Index performs.
Nifty Bank index has captured the GDP growth of the country, due to it being the recipient of benefits from all sectors of the economy. Even in the challenging phase amidst the pandemic, the quality of assets of Banks, in terms of gross and net NPAs, has shown improvements. Bank’s credit off-take would improve over time in tandem with economic recovery from its current muted levels.
However, do note that there is a high market risk due to the threat of the Omicron variant and the US Federal Reserve’s announcement of a reduction in stimulus. The monetary policy normalisation action and stance amidst the inflationary pressures as taken by the RBI may pose a risk to economic growth and affect the performance of the banking sector. The margin of safety appears to be narrow, and the direction for the equity market is contingent on how inflation moves, withdrawal of stimulus money, hike in policy rates, and rising price levels.
Being a sector-oriented Index fund, the scheme will focus on passively investing in stocks that are part of the Nifty Bank Index that compromises only the banking sector, which makes it prone to concentration risk. These factors, among many others, could have a bearing on the Scheme’s performance and may affect negatively if the sector moves out of favour. This makes the scheme a highly risky investment proposition.
Thus, ICICI Prudential Nifty Bank Index Fund is suitable for investors who are aware and possess a decent understanding of the banking sector and have a high-risk appetite with a long investment horizon to sustain various market phases.
This article first appeared on PersonalFN here
