Fund category guide
Best financial services funds in India: what they own, and what to expect from them
Financial services is the largest sector in the Indian market, so a BFSI fund is less a niche bet than a leveraged version of the index. Banks, NBFCs and insurers earn from credit growth and lose from credit mistakes, which makes this a fund about the quality of lending, not just its quantity.
Key takeaways
- BFSI funds are SEBI sectoral schemes: at least 80% of assets must stay in banks, lenders, insurers and market businesses.
- Financials are already about a third of the Nifty 50, so this fund concentrates exposure you almost certainly have.
- The return driver is credit growth; the risk driver is asset quality, and the two are usually revealed years apart.
- Lenders and fee businesses behave differently. Check how much of the portfolio earns spreads and how much earns fees.
- Rate cycles matter: falling rates help borrowers and lenders’ treasury books, and compress deposit-franchise margins.
- Taxed like any equity fund: 12.5% long-term above ₹1.25 lakh a year, 20% short-term.
What is a financial services mutual fund?
A financial services fund is an open-ended equity scheme in SEBI’s sectoral and thematic category, so at least 80% of assets must sit in the sector named in the mandate. For BFSI that means private and public sector banks, housing and vehicle financiers, gold loan companies, microfinance lenders, life and general insurers, asset managers, brokers, exchanges and depositories.
The important distinction inside the portfolio is between lenders and fee businesses. A lender earns a spread and carries credit risk, so its earnings are hostage to the loan book it wrote three years ago. An asset manager, exchange or insurer earns fees or premium float and carries market risk instead. Funds that lean towards the second group behave quite differently in a credit downturn.
Two consequences follow. Financials are already about a third of the Nifty 50, so your core funds hold a great deal of this sector — a BFSI fund concentrates rather than diversifies. And the risk here is not gradual: credit problems appear suddenly, in the form of a bad quarter of provisioning that reveals two years of poor underwriting.
Ways to own the financials theme
“Financial services fund” covers four fairly different mandates. Pick the one whose driver you actually want exposure to.
The core of the sector: deposit franchises lending at a spread. What separates them is the cost of deposits and the discipline of underwriting.
Large private banks
Low-cost deposits, wide branch networks and the most consistent return on assets. The index heavyweights.
Index heavyweightMid-size private banks
Higher growth ambitions and higher funding costs, so credit mistakes show up faster and larger.
Higher betaPublic sector banks
Cheap on book value, improving on asset quality, and still driven substantially by government policy.
Policy-linkedSmall finance banks
Lending to thin-file and small business borrowers at high yields, with correspondingly higher credit costs.
High yieldWhich are the best financial services funds in India?
Check the mix of large banks, smaller lenders and fee businesses first. A fund of large private banks is close to a large cap fund with extra weight; one heavy in microfinance and small NBFCs is a different risk entirely. After that the screen is the usual one: a record through a credit cycle, rolling returns against the Nifty Financial Services index, a reasonable expense ratio, and a manager who was there for the record you are buying.
The table below is ranked on three-year returns and refreshed from live scheme data. Judge any fund against the Nifty Financial Services TRI rather than against the Nifty 50.
| Fund | AUM | 1Y | 3Y | 3Y volatility | Expense |
|---|---|---|---|---|---|
| Quant BFSI Reg Growth | ₹899 Cr | 17.63% | 19.64% | 18.30% | 3.44% |
| Invesco India Fin Srvs Gr | ₹1,845 Cr | 7.68% | 16.05% | 15.20% | 1.77% |
| SBI Banking & Financial Svcs Reg Gr | ₹10,873 Cr | 1.59% | 13.96% | 14.34% | 2.15% |
| Bandhan Financial Services Reg Gr | ₹1,114 Cr | 2.95% | 12.95% | 16.07% | 1.89% |
| Baroda BNP P Bank & Fin Srvs Reg Growth | ₹460 Cr | 4.65% | 12.63% | 15.71% | 2.10% |
| Sundaram Fin Services Opp Reg Gr | ₹1,679 Cr | 8.77% | 11.33% | 16.56% | 1.79% |
| UTI Banking & Financial Services Fund Growth | ₹1,452 Cr | 3.45% | 10.91% | 15.64% | 2.35% |
| Kotak Banking & Financial Services Reg Growth | ₹1,561 Cr | 5.85% | 10.81% | 16.13% | 2.14% |
| Category average | — | 7.07% | 10.89% | 17.07% | — |
Returns annualised (CAGR) for periods over one year, as reported for the plan listed. Expense ratios shown are for that plan; the direct plan of the same scheme carries a lower one. Past performance does not indicate future returns.
How do you choose a financial services fund?
Five checks, in the order they matter. The first two are about how much credit risk you are actually taking.
Lenders or fee businesses — know the mix
Spread businesses carry credit risk and earn through the cycle; insurers, asset managers and exchanges earn fees and carry market risk. A fund tilted to the second group can hold up well in a credit event and lag in a lending boom. Read the top ten holdings.
Screen: check the lender versus fee-income split
How much sits outside the large banks
Microfinance, small finance banks and unsecured consumer lenders offer the highest yields and the fastest deterioration. A meaningful weight there changes the fund’s risk profile far more than its factsheet category suggests.
Screen: weight in unsecured and microfinance lending
A record through a credit cycle
The useful test is 2018 to 2020 — the NBFC funding squeeze followed by pandemic moratoriums. A manager who navigated that has demonstrated something a three-year record cannot show.
Screen: 7+ years, or accept an untested fund knowingly
Expense ratio against the index option
A Nifty Bank index fund costs about 0.22%. An active BFSI fund at 1.0% needs to beat it consistently, and its main advantage is the ability to own insurers, AMCs and exchanges that the bank index excludes.
Screen: direct plan under 1.0%, compared to an index option
Overlap with what you already own
Financials are roughly a third of the Nifty 50 and often more in a flexi cap portfolio. This is the single highest-overlap sector fund available, so run the numbers before adding it.
Screen: overlap with core funds under 35%
BFSI vs bank index vs diversified equity
These three overlap heavily, because financials dominate the Indian index. The question is how much extra weight you want, and whether you want it in banks alone or across lenders, insurers and market businesses.
| Attribute | BFSI fund | Bank index fund | Diversified equity |
|---|---|---|---|
| What it holds | Banks, NBFCs, insurers, AMCs, min 80% | Twelve listed banks only | All sectors, financials near a third |
| Main driver | Credit growth, asset quality, fee income | Bank credit growth and margins | Broad corporate earnings |
| Typical volatility | High | High | Moderate |
| Worst-case drawdown | 40-50% | 40-50% | 25-35% |
| Overlap with core funds | Very high | Very high | It is the core |
| Role in a portfolio | Satellite, 5-10% of equity | Satellite, 5-10% of equity | Core holding |
What would an SIP in a financial services fund grow to?
Set a monthly amount, a horizon and a return assumption. Keep the third slider close to your long-term equity expectation: financials broadly earn what the market earns, with more variation around it, so a much higher number is optimism rather than analysis.
Worked example: a ₹10,000 monthly SIP held for 15 years at 13% a year is ₹18,00,000 invested across 180 instalments. That projects to ₹55,56,813, of which ₹37,56,813 is estimated gains. The figure assumes a constant return; real financial services returns vary year to year and can be negative, so treat it as arithmetic, not a forecast.
- Total invested
- ₹18,00,000
- Estimated gains
- ₹37,56,813
- After 12.5% LTCG tax
- ₹50,87,211
A projection, not a promise. Financials returns depend on the credit cycle and can be flat for years after a shock.
Who should invest in financial services funds?
- You already hold a diversified equity core and deliberately want more weight in credit growth than the index gives you.
- You are comfortable reading asset quality — gross and net NPAs, provision coverage, slippages — rather than only returns.
- You can hold a 5-10% satellite position for seven years or more, including through a credit event.
- You want exposure to insurance, asset management and exchanges, which a bank index fund excludes entirely.
And who should skip it
- This would be your first equity fund. Start with a diversified or index fund and build the core.
- Your existing funds are already a third or more in financials. A BFSI fund then makes one sector decide your outcome.
- You need the money inside five years, or you would sell after a 45% fall.
What are the risks?
Credit risk arrives all at once
Bad lending is invisible while loans are growing and obvious when they stop. A single quarter of elevated provisioning can reveal two years of weak underwriting, and the stock reacts to the whole revelation at once.
Funding and liquidity for NBFCs
Non-bank lenders depend on wholesale funding. When credit markets tighten, as they did in 2018, the problem is not asset quality but the ability to refinance at all.
Rate and margin cycle
Falling rates compress the yield on loan books faster than deposit costs adjust for banks with strong franchises. Rising rates do the reverse. Net interest margin moves with the cycle either way.
Regulatory intervention
Risk weights, lending caps, fee restrictions and product rules change earnings by circular. Recent tightening on unsecured lending is a live example.
Overlap and concentration
Because financials are already the market’s largest sector, a BFSI fund doubles down on what you own. In a financials-led correction, your core and satellite fall together.
How are financial services funds taxed?
Financial services funds are equity-oriented schemes, so equity capital gains rules apply — the same as a large cap or flexi cap fund. Tax is triggered on redemption or switch, not on notional growth.
Held 12 months or less
20%
Short-term capital gains, taxed at a flat 20% regardless of your income slab.
Held over 12 months
12.5%
Long-term capital gains, taxed at 12.5% without indexation on gains above the annual exemption.
Annual LTCG exemption
₹1.25 L
The first ₹1.25 lakh of long-term equity gains in a financial year is tax-free, across all equity funds and shares combined.
Rates as applicable to resident individuals for FY 2026-27 under the current capital gains regime. Surcharge and cess apply on top. One point specific to this category: because financials already sit at a third of the index, rebalancing out of a BFSI fund after a strong run is common — and if it happens inside 12 months, the gain is taxed at 20%. Tax rules change; confirm your position with a tax adviser.
Terms you will meet on a BFSI fund factsheet
- Net interest margin
- The spread between what a lender earns on assets and pays on liabilities. The core profitability measure for banks.
- Gross and net NPA
- Non-performing assets before and after provisions. The headline measure of how much of the loan book has gone bad.
- Slippages
- Loans turning bad during the period. A leading indicator of future provisioning, watched more closely than the NPA stock.
- Provision coverage ratio
- How much of the bad loan book is already provided for. Higher coverage means fewer surprises ahead.
- CASA ratio
- The share of deposits in current and savings accounts. High CASA means cheap, sticky funding and a structural cost advantage.
- Credit cost
- Provisions as a percentage of loans. The number that turns a good lending year into a bad one.
- VNB margin
- Value of new business margin — the profitability measure for life insurers, replacing earnings as the metric that matters.
- Return on assets
- Profit relative to the balance sheet. The cleanest way to compare lenders of different sizes and leverage.
Frequently asked questions
What is a financial services mutual fund?
A sectoral equity scheme that must keep at least 80% of its assets in financial companies — private and public banks, non-bank lenders, housing finance, gold loan and microfinance companies, life and general insurers, asset managers, brokers, exchanges and fintech. The remaining 20% is at the manager’s discretion.
Which are the best financial services funds in India?
Most large BFSI funds hold similar large private banks, so the differences sit in the rest of the portfolio. ICICI Prudential Banking & Financial Services, SBI Banking & Financial Services and Nippon India Banking & Financial Services are the larger broad mandates. Sundaram Financial Services Opportunities carries more weight in insurers and market businesses. A Nifty Bank index fund gives you banks alone at a fifth of the cost. Compare rolling returns, expense ratio, asset quality of the holdings and manager tenure.
Are financial services funds a good investment in 2026?
Credit growth is healthy, bank balance sheets are in better shape than they were for a decade, and insurance and asset management penetration in India remains low. The caution is overlap: financials are already about a third of the index, so this fund concentrates rather than diversifies, and a financials-led correction would hit your core holdings at the same time. Size it at 5-10% of equity.
How much of my portfolio should be in financial services funds?
Cap it at 5 to 10% of your equity allocation, and check your existing exposure first — this is the highest-overlap sector fund in the Indian market. If your flexi cap and index funds are already 35% in financials, adding a BFSI fund may take one sector past half your equity.
How are financial services funds taxed in India?
As equity-oriented schemes. Units held 12 months or less are taxed at 20% as short-term capital gains. Units held longer are taxed at 12.5% as long-term capital gains, with the first ₹1.25 lakh of long-term equity gains in a financial year exempt across all your equity holdings combined.
What returns do financial services funds give?
Broadly market-like with wider swings. Because the sector is such a large part of the index, BFSI fund returns tend to track the market over long periods, outperforming in credit upcycles and falling harder when asset quality is questioned. Dispersion between funds is narrower here than in most sector categories.
BFSI fund or a bank index fund?
A Nifty Bank index fund holds twelve banks at 0.22% and nothing else. A BFSI fund can also own insurers, asset managers, exchanges and NBFCs, which are the faster-growing and less credit-sensitive parts of the sector. If you want financials beyond lending, the active mandate is the only route; if you want cheap bank exposure, the index fund wins on cost.
Wondering how much financials exposure you already have?
Financials are roughly a third of the Nifty, so your index and flexi cap funds are already heavily invested here. Talk to a Dhan Saarthi advisor — twenty minutes on your existing portfolio, horizon and tax position, and you will know whether a BFSI fund adds anything or just doubles up.
Disclaimer
Mutual fund investments are subject to market risk. Read all scheme related documents carefully before investing. Past performance is not indicative of future results, and the value of your investment can go down as well as up.
Sectoral and thematic funds carry concentration risk and are meant for investors who understand that a single sector can underperform the broader market for extended periods. This page is educational content on a fund category, not investment advice or a recommendation to buy or sell any specific scheme.
Dhan Saarthi is a mutual fund distribution platform. Fund selection should reflect your own goals, horizon, tax position and risk tolerance. Consider consulting a SEBI-registered investment adviser before acting on anything here. Scheme names are mentioned for illustration and are not endorsements.
Tax rates referenced apply to resident individual investors under the capital gains regime in force at the date of publication and may change. Returns shown are illustrative placeholders, not live NAV-based figures. Calculator outputs are arithmetic projections based on the assumptions you enter, not guarantees.