What Are Banking Mutual Funds? Meaning and How to Invest?

The banking and financial sector is often considered the driving force of the economy — and investors can tap into its potential growth through banking mutual funds. These are equity funds that focuses chiefly on companies in the banking and broader financial services sector.

These funds may potentially benefit during favourable credit growth and interest-rate cycles but carry higher concentration risk and volatility compared to diversified equity funds due to their sector-specific focus. This article tells you more about what banking mutual funds are and who may consider investing in them.

Table of contents

• What are banking mutual funds?
• Key features of banking mutual funds
• Taxation rules related to banking funds
• Should you invest in banking funds?
• Things to consider before investing in banking funds
• How to invest in a banking mutual fund
• Bajaj Finserv Banking and Financial Services Fund

What are banking mutual funds?

A banking fund or a banking and financial services fund is a type of sectoral or thematic equity scheme that invests a minimum of 80% of its assets in banks and financial services companies. Sector funds are classified under equity because they primarily invest in shares; their narrow focus means diversification is limited, and performance often moves with sector cycles.

In simple terms, a banking fund pools investors' money to invest primarily in banking and financial services stocks. Due to this concentration, these funds typically experience higher volatility than diversified funds – they can outperform broader markets when the financial sector is strong but may underperform and face steeper declines during sector-specific downturns.

Read Also: What are Banking and PSU funds?

Key features of banking mutual funds

• Targeted exposure to a core part of the economy: India’s financial system drives credit to households and businesses. A banking mutual fund offers concentrated exposure to that engine, which may be useful, especially if one has an understanding of banking earnings or interest rate cycles.
• Clear mandate and disclosures: According to regulations, sector or thematic schemes must invest at least 80% of their assets in the stated sector or theme, which gives you additional clarity about where your capital is being invested.
• Potential for tactical allocation: Experienced investors may use sector funds to tilt their portfolio during different stages of the economic cycle (e.g., if credit growth is improving).

Taxation rules related to banking funds

Capital gains for equity-oriented mutual funds, including sectoral funds, are taxed as follows:

• Short-term capital gains (STCG): If you sell units held 12 months or less, gains are taxed at 20%.
• Long-term capital gains (LTCG): If you sell units held more than 12 months, gains above Rs. 1.25 lakh per financial year are taxed at 12.5%.

Note: The above rates are exclusive of applicable surcharge and cess.

For equity-oriented mutual funds, more than 12 months qualifies as long-term from a taxation perspective. IDCW payouts, if any, from banking mutual funds are taxed at the investor’s applicable slab rate and a 10% TDS is deducted for amounts more than Rs. 10,000 from the same AMC (Asset Management Company) in a financial year.

Should you invest in banking funds?

A banking fund may be suitable for investors who already hold a diversified equity core (for instance, flexi cap or large cap funds) and want a measured, tactical exposure to financials. Because potential returns depend heavily on sector-specific trends (asset quality, credit growth, interest rate movements, regulatory changes), performance can be significantly more volatile than diversified fund. Sector funds may be cyclical and carry concentration risk. It is recommended to consider a banking and financial services fund if you:

• Are willing to accept higher volatility from concentrated sector exposure.
• Have a clear investment thesis (for example, improving credit cycle) and a sufficiently long investment horizon to withstand significant sector volatility.
• Are prepared to limit allocation to banking funds to a conservative portion of your overall equity portfolio, in line with your risk tolerance and financial goals (it is recommended to consult a financial advisor to determine specific allocation percentages).

Things to consider before investing in banking funds

• Sector concentration: Potential capital gains or capital erosion is driven by banks, NBFCs (Non-Banking Financial Companies), and other financials. Hence, there is minimal diversification.
• Cycle sensitivity: Banking earnings may be impacted by interest rate changes, credit costs, and regulations; sector funds might be influenced more than diversified equity.
• Risk: Sectoral/thematic funds typically carry higher risk than diversified equity funds due to their concentrated focus.
• Costs and documents: It is advised to review the cost disclosures in the relevant scheme document/factsheet. The expense ratio and exit load will vary by scheme. These documents can be accessed on the AMC's website, AMFI website, or obtained from your financial advisor.
• Suitability to your financial plan: A banking mutual fund may serve as a smaller, supporting investment alongside your main diversified portfolio, with the amount invested depending on your risk profile and time horizon. Position and time horizon are important.

How to invest in a banking mutual fund

• Step 1: Consider the role of this investment—whether it serves a tactical purpose or forms part of a longer-term sector allocation.
• Step 2: Go through the scheme documents such as the SID (Scheme Information Document), KIM (Key Information Memorandum), and factsheet to help understand details like the fund’s mandate, Riskometer, expense ratio, and exit load.
• Step 3: Choose an investment route suited to their goals. A SIP (Systematic Investment Plan) could spread entry points across market cycles; lumpsums concentrate timing risk. Tax treatment is based on holding period.
• Step 4: Monitor the investment periodically, by tracking sector indicators (credit growth, asset quality) and the scheme’s portfolio composition, which is disclosed monthly.

Bajaj Finserv Banking and Financial Services Fund

If you’re looking to invest in this sector, you may consider the upcoming Bajaj Finserv Banking and Financial Services Fund. This is an open-ended equity scheme that seeks to capture India’s evolving BFSI megatrends, including fintech innovation, digitalisation, financial inclusion and growing demand for financial services. The fund will invest not just in banks and NBFCs but also insurers, AMCs, and other capital market participants, offering exposure beyond traditional lending-focused BFSI. The New Fund Offer (NFO) period for this scheme begins on Monday, November 10, 2025, and ends on Monday, November 24, 2025. The fund will reopen for subscription within five business days of allotment. To read more about the scheme and for statutory details, click here.

FAQs

What are the advantages of investing in banking mutual funds?

They deliver targeted exposure to a core economic sector; mandates are clear (with at least 80% in the chosen sector or theme), and disclosures including the Riskometer help with oversight.

How are the potential returns from banking mutual funds taxed?

Being equity oriented, gains on units held 12 months or less are taxed at 20% for sales on/after July 23, 2024; gains on units held more than 12 months are taxed at 12.5% on the amount above Rs. 1.25 lakh per financial year for sales on/after July 23, 2024.

What are the key risks or limitations associated with banking mutual funds?

Concentration in a single sector, cyclical performance, and the possibility of sharper downside than diversified equity. Sector funds tend to be riskier due to limited diversification and timing sensitivity.

For which type of investor might banking mutual funds be suitable?

Investors with a diversified equity core who may be comfortable taking targeted sector exposure, accept higher volatility, and might hold through cycles.