Mutual Fund: How to invest in banking sector stocks
Premium- With numerous restrictions/limits placed on cash transactions under the Indian tax laws, increasingly transactions are routed through the banking channel
Banking is considered to be the vein of an economy. Growth of banking and economy is linked as they are interdependent. It is widely anticipated that Indian economy is expected to do better in the years ahead; so it goes without saying that banking as a space too stands to gain.
With numerous restrictions/limits placed on cash transactions under the Indian tax laws, increasingly transactions are routed through the banking channel. Furthermore, the introduction of core banking system in Indian Post Offices is likely to be a game changer for millions of post office account holders who now will be able to access the banking system’s efficiency.
Why invest through an Index Fund?
Direct equity investing is no easy task as it involves picking up the right company, continuously monitoring its earnings and other developments related to the company. Since all of these is a challenge for a lay investor, they can consider investing in an index fund or a diversified equity mutual fund scheme.
An index fund like other open ended equity mutual fund schemes offers you the convenience of investing either lump sum or in a systematic manner through Systematic Investment Plan (SIP). Some of these even provide innovative features like Booster STP step-up SIP and Systematic Withdrawal Plan (SWP). Hence, for most of the investor an index fund tends to come in very handy.
Index fund by design is built to imitate an underlying index constituents. The benefit of this arrangement is that the index provider periodically reviews these constituents to weed out any non-performing stock in it. Also, there is no requirement of a demat account. In short, even with a very low investment amount, an investor can invest into a number of companies in one go. Last but not the least, the expenses associated with an index fund is very low.
What is Nifty Bank Index and how to go about investing in it?
NSE backed Nifty Bank Index comprises of 12 top liquid and well capitalised banks, spread across private and public sector. The index comprises sectors leaders like SBI, HDFC Bank, ICICI Bank to name a few. Apart from these, the index also includes new age banks like IDFC First Bank and AU small Finance Bank. The constituents of this index is reviewed on a half yearly basis thus eliminating the task of an investor to review individual stocks. In terms of performance, the Nifty Bank Index has outperformed both Nifty 50 and Nifty 500 Indexes in six out of the last 10 years.
So, if you are an investor looking to take exposure to banking names, then investing in this index is an optimal solution. Recently, one of the leading mutual fund houses – ICICI Prudential Mutual Fund - has announced an index fund offering based on this index for which the NFO is open till February 24, 2022.
Taxation on Investing in Index Fund
Since, this is an equity oriented index fund, the profit made on this investment is eligible for concessional tax treatment under the income tax laws. Profits made on redemption within 12 months is treated as short term capital gains and will be taxed at a flat rate of 15%. If the redemption is made after holding for more than 12 months, then there is no tax liability on initial long term capital gains of Rs. 1 lakh and the balance is taxed at flat concessional rate of 10%. The initial long term capital gains of one lakh rupee will include all long term capital gains of direct listed shares as well as all equity oriented schemes.
Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail.com and @jainbalwant on Twitter.
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