Why should you consider investing in the Nifty Financial Services Ex Bank Index?

India has witnessed a significant rise in income levels across various demographics. This upward trajectory is not merely a statistical observation but a fundamental shift in the nation's economic landscape. Global experience offers valuable insights into how increasing income levels impact the economy. Historically, countries that have experienced sustained income growth have witnessed a corresponding boost in various economic indicators.

According to the IMF World Economic Outlook, India's nominal GDP per capita for the year 2024 is projected to be $2,731. Many experts believe that the GDP per capita of USD 2,000 is the mark after which many countries, like China, Taiwan, etc., have embarked on a faster rate of growth.

Rising income stimulates demand for goods and services, leading to increased production, job creation, and overall economic prosperity. This virtuous cycle of growth generates opportunities for businesses across sectors, including financial services.

Financial services play a pivotal role in facilitating economic growth and development, serving as a bridge between savers and investors. As income levels rise, individuals and businesses seek access to a diverse range of financial products and services to manage and grow their wealth. From banking and insurance to asset management and fintech solutions, the financial services sector caters to the evolving needs of a dynamic economy.

Like in any other sector, innovation lies at the heart of the financial services sector's growth trajectory. Technological advancements, coupled with changing consumer preferences, have spurred a wave of innovation, transforming traditional financial services delivery models.

Fintech companies, in particular, have emerged as disruptors, offering innovative solutions such as digital payments, robo-advisory services, and peer-to-peer lending platforms. These innovations not only enhance efficiency and accessibility but also foster financial inclusion, reaching previously underserved segments of the population.

Amidst this backdrop of income-driven growth and innovation, the Nifty Financial Services Ex Bank Index based offering emerges as a good investment opportunity to consider.

Understanding Nifty Financial Services Ex Bank Index

This index provides investors with exposure to a broad spectrum of participants in the financial services sector such as insurance providers, asset management firms, housing finance companies, brokerage firms and fintech enterprises, but minus the banks. The number of stocks in the index can range from 10 to 30.

The largest 30 stocks from the eligible industries are chosen based on the six-month average free-float market capitalisation. Each of these names are selected from the Nifty 500 universe and their individual weights are capped at 25%. The index rebalancing is conducted semi-annually.

What makes the offering compelling is that the index takes a detour from the often taken path of taking exposure to banks when it comes to investing in the financial services theme. Given that banks are likely to be present in most of the diversified portfolio offering, by investing in this index, an investor ensures that there is a wholesome exposure to the financial landscape of the country.

When it comes to index performance, the Nifty Financial Services Ex-Bank Index (TRI), as of May 31, 2024, has delivered an impressive return of 29.89% over the last one-year and a healthy CAGR of 12.18% on a five-year basis.

Investor Perspective

There are ETF and index funds available based on this index. Depending on one’s portfolio requirement, an investor can make a choice between either of the product structures. The advantage of the ETF approach is that units are held in demat form and can be bought or sold easily like equity shares on the exchange during the market hours.

Investors seeking exposure to India's burgeoning financial services sector may find this offering to be an appealing one. Additionally, investors looking to diversify their portfolios and capitalise on the potential growth opportunities offered by India's evolving economy could also benefit from investing in this index based offering. However, the caveat here is that the investment horizon should be long term and according to the asset allocation plan created with help of a financial adviser.

Thus by investing in this index based offering, investors can position themselves to ride the wave of income-driven growth and innovation, propelling India's financial services sector into the future.

Chintan Haria, Principal – Investment Strategy, ICICI Prudential AMC