While India seems to be on track to achieving its ambitious goal of becoming a USD 5 trillion economy by 2025, the banking sector is likely to play a strong role in enabling this growth. Further, as the economy grows, the banking sector will also witness high growth.
Indian banking sector holds tremendous growth potential, given the robust demand for their services. With NPAs on a steady decline, newer opportunities are being engendered due to improving credit growth and corporate profitability. In the backdrop of such a landscape, private banks, in particular, have become a compelling long-term investment opportunity.
Banks are vital for economic growth, providing loans for capex, working capital, purchasing homes, autos etc. Private banks continue to gain market share across loans and deposits and have higher profitability. Additionally, they have higher capital adequacy, better asset quality, and higher efficiency in the overall banking sector. However, it is important to note that while the banking sector is poised for growth, you will still need to select the best private banks to harness this opportunity optimally.
Improving fundamentals and valuations below historical long-term averages make the HDFC NIFTY Private Bank ETF an attractive proposition for investors looking for exposure to the private bank segment. The underlying NIFTY Private Bank Index has generated higher average rolling returns over 1, 3, 5 and 10-year horizons compared to the NIFTY Bank TRI, NIFTY 500 TRI and NIFTY 50 TRI.
HDFC AMC which has been a trusted fund manager in Index Solutions for 20+ years has launched HDFC NIFTY Private Bank ETF. It is an open-ended scheme replicating/tracking NIFTY Private Bank Index. The scheme aims to track the underlying Index and capture the growth potential of banks in the private sector.
Table 1: HDFC NIFTY Private Bank ETF
|An open-ended scheme replicating/tracking NIFTY Private Bank Index
|Exchange Traded Fund
|The investment objective of the scheme is to provide investment returns that, before expenses, correspond to the total returns of the Securities as represented by the NIFTY Private Bank Index, subject to tracking errors. There is no assurance that the investment objective of the scheme will be realised.
|Rs 500/- and in multiples of Re 1/- thereafter.
|Rs 10/- per unit
|NIFTY Private Bank Index (TRI)
|October 28, 2022
|November 09, 2022
(Source: Scheme Information Document)
The investment strategy for HDFC NIFTY Private Bank ETF will be as follows:
HDFC NIFTY Private Bank ETF will invest in stocks comprising the underlying Index in the same ratio as per the Index to the extent possible and, to that extent follows a passive investment strategy, except to the extent of meeting liquidity and expense requirements.
Since the scheme is an exchange-traded fund, it will only invest in securities constituting the underlying Index. The underlying index consists of the 10 largest and most liquid private bank stocks. The scheme endeavours to capture the growth potential of private banks riding India’s economy. However, due to corporate action in companies comprising the index, the scheme may be allocated/allotted securities which are not part of the Index. Such holdings would be rebalanced within 7 Business Days from the date of allotment/listing of such securities.
As part of the Fund Management process, the scheme may use derivative instruments such as futures and options or any other derivative instruments that are permissible or may be permissible in future under applicable regulations. However, trading in derivatives by the scheme shall be for restricted purposes as permitted by the regulations. The scheme may also invest in debt & money market instruments in compliance with regulations to meet liquidity and expense requirements.
Under normal circumstances, the Asset Allocation of the scheme will be as under:
Table 2: HDFC NIFTY Private Bank ETF
|Indicative Allocations (% of Net Assets)
|Securities covered by NIFTY Private Bank Index
|Debt Securities & Money Market Instruments, units of Debt Schemes of Mutual Funds
|Low to Medium
(Source: Scheme Information Document)
About the benchmark
The NIFTY Private Bank Index is designed to reflect the performance of the banks from the private sector. Companies should form part of NIFTY 500. Banks having 50% or more of their outstanding share capital held by central or state government directly or by central or state government-controlled banks will be excluded from stock selection.
Here’s the list of the top 10 constituents by their weightage under the Index as on September 30, 2022:
(Source: HDFC NIFTY Private Bank ETF PPT)
# Note that the Index is rebalanced on a semi-annual basis in March and September.
Who will manage HDFC NIFTY Private Bank ETF?
Mr Krishan Kumar Daga and Mr Arun Agarwal will be the designated fund managers for this scheme.
Mr Krishan Kumar Daga is a B. Com graduate and has over 32 years of experience, of which 13 years in Equity Research and over 14 years in Fund Management. Prior to joining HDFC AMC, he was associated with Reliance Capital Asset Management Company Ltd. as Fund Manager/Head – ETF, Reliance Capital Ltd. as Vice President, and Deutsche Equities as Vice President.
At HDFC Mutual Fund, Mr Daga currently manages HDFC Arbitrage Fund, HDFC Banking ETF, HDFC Equity Savings Fund (Arbitrage Assets), HDFC Gold ETF, HDFC Gold Fund (FOF), HDFC Index Fund – NIFTY 50 Plan, HDFC Index Fund – SENSEX Plan, HDFC Multi-Asset Fund (Gold related instruments and Arbitrage Assets), HDFC NIFTY 50 ETF, HDFC SENSEX ETF, HDFC Nifty 100 ETF, HDFC NIFTY Bank ETF, HDFC Nifty Next 50 ETF, HDFC Nifty 100 Index Fund, HDFC Nifty100 Equal Weight Index Fund, HDFC S&P BSE SENSEX ETF, HDFC NIFTY50 Equal Weight Index Fund, HDFC Developed World Indexes Fund of Funds, HDFC NIFTY100 Quality 30 ETF, HDFC NIFTY50 Value 20 ETF, HDFC NIFTY Growth Sectors 15 ETF, HDFC NIFTY200 Momentum 30 ETF, HDFC NIFTY100 Low Volatility 30 ETF, and HDFC NIFTY Next 50 Index Fund.
Mr Arun Agarwal is a Chartered Accountant and B.com graduate. Collectively he has over 23 years of experience in equity, debt and derivative dealing, fund management, internal audit and treasury operations. Prior to joining HDFC AMC, he was associated with SBI Funds Management Pvt. Ltd. as Assistant Vice President, ICICI Bank Limited as Chief Manager, UTI Asset Management Pvt. Ltd. as Manager and UTI Asset Management Pvt. Ltd. as Assistant Manager.
At HDFC Mutual Fund, Mr Agarwal currently manages, HDFC Arbitrage Fund, HDFC Banking ETF, HDFC Equity Savings Fund (Arbitrage Assets), HDFC Gold ETF, HDFC Gold Fund (FOF), HDFC Index Fund – NIFTY 50 Plan, HDFC Index Fund – SENSEX Plan, HDFC Multi-Asset Fund (Gold related instruments and Arbitrage Assets), HDFC NIFTY 50 ETF, HDFC SENSEX ETF, HDFC Nifty 100 ETF, HDFC NIFTY Bank ETF, HDFC Nifty Next 50 ETF, HDFC Nifty 100 Index Fund, HDFC Nifty100 Equal Weight Index Fund, HDFC S&P BSE SENSEX ETF, HDFC NIFTY50 Equal Weight Index Fund, HDFC Developed World Indexes Fund of Funds, HDFC NIFTY100 Quality 30 ETF, HDFC NIFTY50 Value 20 ETF, HDFC NIFTY Growth Sectors 15 ETF, HDFC NIFTY200 Momentum 30 ETF, HDFC NIFTY100 Low Volatility 30 ETF, and HDFC NIFTY Next 50 Index Fund.
Fund Outlook – HDFC NIFTY Private Bank ETF
HDFC NIFTY Private Bank ETF aims to provide returns that closely correspond to the total returns of the Nifty Private Bank Index, subject to tracking errors. The scheme endeavours to benefit from the growth potential of banks from the private sector.
Private Banks have higher capital ratios and ROEs and lower GNPA (Gross Non-performing Assets) ratios compared to sectors peers. Additionally, the credit growth of Private Bank is outpacing the rest of the sectors. The banking sector plays a strong role in a country’s economic reconstruction and growth. It not only bridges the financing gap in the country but also provides a range of other services to retail customers.
The fund will provide investors exposure to the top 10 largest and most liquid private banks in the country by investing in the underlying securities of the Index. Private Banks have maintained higher RoE and RoA ratios than Scheduled Commercial Banks (SCBs) on aggregate, highlighting their higher efficiency. The fortune of this scheme will be closely linked to how the Nifty Private Bank Index performs.
However, do note that being a sectoral ETF, the scheme will be prone to high volatility compared to other diversified equity funds and higher concentration risk due to its limited exposure to a single sector. In addition, the persistent repercussions of the geopolitical tension, spiralling inflation, and hike in policy rates may cause a significant risk to economic growth and continue the prevailing high market volatility. The margin of safety appears to be narrow, and the clear direction for the equity market from the current elevated levels is uncertain.
These factors, among many others, could have a bearing on the Index and its top constituents, which may impact the scheme’s performance and may affect negatively if the sector moves out of favour. This makes HDFC NIFTY Private Bank ETF a highly risky investment proposition. Only those investors with a high-risk appetite, a long investment horizon of at least 5-7 years, and who hold a better understanding of the private banking sector may consider investing in HDFC NIFTY Private Bank ETF.
This article first appeared on PersonalFN here