December 6, 2023
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DSP Mutual Fund has launched the DSP Banking & Financial Services Fund (DSP BFSF), banking on the sector that has outperformed the broader Nifty 50 Index in all 10-year periods. However, the sector has been underperforming the Nifty 50 Index since September 2019.

“Hence, the possibility of a reversal in underperformance combined with reasonable valuations for the Banking and Financial Services sector along with their strong balance sheets present an interesting opportunity to investors,” said DSP Mutual Fund in a statement. 

According to the AMC, the sectoral scheme offers investors a long-term structural opportunity in the banking and financial services space.

The New Fund Offer for DSP BFSF will open for subscription on November 20, 2023, and will close on December 4, 2023.

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Investment Objective of the Fund:

According to the scheme information document, the primary investment objective of the scheme is to seek to generate returns through investment in domestic and overseas equity and equity-related securities of companies engaged in the banking and financial services sector.

The open-ended equity scheme will invest in the banking and financial services sector, encompassing major areas like non-banking financial companies (NBFCs), including housing finance companies, life insurance, non-life insurance, AMCs, exchanges, and depositories.

According to DSP Mutual Fund, all of these sectors have grown at a faster rate than the nominal GDP of India in the last 15 years, combined making up a profit opportunity of over $4 trillion.

“Companies in the BFSI sector have large profits compared to other sectors. The profit pool is also growing due to the addition of diverse businesses across insurance companies, mutual funds, wealth management firms, tech platforms supporting the industry, payments and fintech,” said Kalpen Parekh, MD & CEO, DSP Mutual Fund.

How will the scheme allocate its assets?

“Under normal circumstances, the asset allocation of DSP BFSF would be between a minimum of 80% to a maximum of 100% in equity and equity-related securities of companies in the Banking and Financial services sector, up to 20% in equity and equity-related securities of other companies, up to 20% in debt and money market instruments, and up to 10% in units issued by REITs and InvITs,” said the AMC.

Further, as per the scheme document, up to 20 per cent of its total assets may be invested in foreign securities. The intended amount for investment in overseas ETFs is $70 million, and the intended amount for investments in other overseas securities is $130 million.

How will the scheme benchmark its performance?

The performance of the DSP Banking & Financial Services Fund will be benchmarked against Nifty Financial Services TRI. According to the firm, the Nifty Financial Services TRI has delivered over 12 per cent returns in 90 per cent of times over a 7-year timeframe compared to 52 per cent for Nifty 50 TRI.

Banking, Financial Services, and Insurance (BFSI) form 38 per cent of the profit pool of the Top 500 companies in India but are just 26 per cent of the market cap. The last 10-year profit growth for BFSI was 17 per cent compared to 10 per cent among Top 500 companies excluding BFSI.

“Bank balance sheets have also grown stronger with lower NPAs. This could aid a sustained pick up in credit growth,” said DSP Mutual Fund.

“We prefer to raise money in such sectors with long-lasting growth when their prices are falling or consolidating. Lenders also have leverage as raw material and hence go through cycles of volatility. In recent years, stocks in the BFSI space have corrected, thus increasing the margin of safety for an investor,” said Parekh.

Pros of investing in DSP BFSF:

According to the DSP mutual fund, here are benefits you can consider if you want to invest in the fund:

1. The fund benchmark, Nifty Financial Services TRI, has delivered a 17.6 per cent Compound annual growth rate (CAGR) since January 2004, beating the 14 per cent CAGR from Nifty 50 TRI.

2. The investor also gains access to the new age additions to the Banking, Financial Services, and Insurance (BFSI) mix, such as payment processors, insurance and stock brokers, wealth management, digital Infrastructure, mutual funds, loan direct sales agents (DSAs).

3. The banking non-performing assets (NPAs) are currently at an all-time low, and robust credit growth has resulted in improved balance sheets. Thus providing you an opportunity to build your investment on a solid foundation.

4. Your portfolio could get quality exposure to fundamentally sound international BFSI businesses which currently may be unavailable in India.

5. The Nifty Financial Services TRI has been underperforming the Nifty 50 TRI since September 2019, with an annualized difference of 3.9 per cent. This trend likely indicates a potential for a turnaround.

Risks to consider:

1. DSP Banking & Financial Services Fund provides exposure only to the Financial Services sector, leading to concentration risk.

2. This fund can have higher volatility and drawdowns as compared to diversified equity funds.

3. This fund can underperform diversified equity funds in the short-term.

Suitable for long-term capital growth:

This scheme is suitable for investors who are seeking long-term capital growth and want to invest in equity and equity-related securities of banking and financial services companies. According to the riskometer, the risk associated with the mutual fund is “very high.”

Investment can be done under the scheme with a minimum investment of Rs 100 per plan/option. There is no upper limit for investment.

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