Weekly Musings – NFO Pick (Quant BFSI Fund)

5 Jun 2023 , 08:27 AM

Here BFSI refers to the combination of banking, financial services, and insurance. In the Nifty 50 index, the BFSI stocks account for close to 37-38% of the total Nifty value, showing how predominant they are. The Quant BFSI Fund opened for NFO subscription on 01^st June 2023 and the subscription to the NFO will close on 14^th June 2023. Of course, being an open ended fund, it would be available for NAV linked purchase and redemption once the allotment under the NFO is completed. 

The big question that arises about the Quant BFSI Fund is what is the logic of a BFSI Fund at this point when the Bank Nifty is already scaling an all-time high? Incidentally, the Quant BFSI Fund is not just looking at the banking sector per se, but at the confluence of technology, digitization, and banking. There are three things that the Quant BFSI Fund is betting on. Firstly, the bottoming of risk appetite is a key trigger for the fund launch. In terms of business cycle outlook, the current situation is almost similar to early 2020. BFSI is the best proxy to ride the market with a Beta edge. Secondly, the proprietary framework used by Quant points to the culmination of several cycles including the war and financial crisis. Finally, with rates having nearly peaked out in most economies, the risk-on money would automatically get directed to financials.

Why BFSI and digital combination is a great story

The fund is predicated on the special place that financial services have in the expansion of the digital footprint across India. Due to a combination of government initiatives, inclusive banking as well as cheaper and high quality bandwidth; digital financial services have taken off. The Quant BFSI Fund looks to leverage on this very combination.

• Let us talk about banking first. Today, India accounts for 40% of the world’s digital financial transactions  by volumes. UPI has been the big driver for this shift. Banking stock picks of the fund would focus on technological innovations, inclusion, digital lending practices, agri finance digitization and the RBI launch of CBDC.

   

• In the financial services space, the intent is to capture the big growth. Market cap of financial services has grown from 6% of the market in FY01 to 24% of the market in FY21. That is a huge opportunity matrix to tap. India already has over 2,100 fintech companies forcing changes in the way financial services are delivered. Financial advisory, digital lending, digital gold and mutual fund selling are some of the big areas to focus on.

   

• Lastly, we come to insurance, the third pillar of the BFSI theme. Despite the large number of policies touted by Indian insurers, the penetration still remains quite low among retail customers. COVID has underlined the importance of life cover and health cover more than ever before and that has created a favourable momentum. Insurance market is slated to touch $222 billion by 2026 with total investable corpus of $1 trillion.

There are some short term challenges due to the Banking Index touching its all-time high. However, the bet here is that the confluence of a growth upcycle, innovations in finance and digital banking would change the banking landscape for the better in the medium term.

What you should know about the fund strategy and positioning?

Let us talk about the fund positioning first. The Quant BFSI Fund is essentially a bet on the banking and financial services sector in India from a medium term perspective. BFSI has a high correlation to the growth of the economy and hence would also serve as a proxy for the above-average growth in GDP in the coming years. The fund is a sectoral / thematic fund so the risk of concentration would be there, although the high correlation with Nifty is a natural hedge. It is targeted at the investors with a longer term perspective of 4-5 years. 

What will be the strategy of the Fund when it comes to allocation? The focus would be on BFSI companies expected to benefit from financial inclusion and evolving digital shifts. The universe of the Quant BFSI fund would include banks, insurers, fintech players, AMCs, exchange platforms and credit rating agencies. It will be more of a macro fund since the bet is more on the inflexion point of growth over the medium term. BFSI has a natural hedge due to its high correlation with the Nifty, but the fund will also actively hedge if the investment environment turns distinctly risk-off. 

What works for the Quant BFSI Fund?

The Quant BFSI Fund is a macro bet on an inflexion point in the Indian economy. While BFSI is being seen as a proxy for overall GDP growth, the focus is more granular on strategic areas like financial inclusion, fintech and digitization. Here is what works for the fund.

• India just became the most populated country in the world, pipping China to the post. While population may look like a challenge, it is also the source of demographic dividends. As these dividends get channelized productively, the big beneficiary would be the BFSI space.

   

• With a young market comprising of young people, the demand for banking, insurance and other financial services is likely to grow exponentially in the coming years. The future belongs to the investors who catch this trend young and watch it grow. That is where the fund is being positioned.

   

• The Indian government has been very supportive of financial inclusion and digital technologies to make banking and financial services more accessible. That has created a billion dollar opportunity for investors looking at this confluence of finance and technology. The digital infrastructure is at par with the best in the world.

   

• This fund would be different from traditional banking funds in the sense that it is more a bet on financial inclusion and digitization. It is not just about traditional metrics like deposits, advances, NII and NIMs. The Quant BFSI Fund will focus on stories that would give the investor a natural diversification even within the BFSI space.

   

• Finally, one small word on core banking and how it has also improved in the last one year. In the last one year, the net interest income (NII) of banks has grown 21% while the pre-provision profits of banks have grown 12%. Thanks to lower provisioning, PAT is up 48% yoy, even as gross NPAs are down 205 bps on average at 4.5%.

Clearly, the massive clean up of the bank balance sheet and the subtle technological shifts are not reflected or priced into BFSI stocks. That is what makes this space attractive.

Quant BFSI Fund 101

Here are some basics about the fund that investors must know. It will be an open-ended sectoral fund with focus on the BFSI sector. The performance will be benchmarked to the Nifty Financial Services TRI (total returns index). The fund offers direct plans, regular plans as well as growth and IDCW options to the investors. There is no entry load or exit load on the fund, irrespective of the holding period. The minimum application amount in the NFO will be Rs5,000 and subsequent purchases can be in multiples of Rs1,000.

There are a couple of things about the fund to know. Quant Funds have been among the top performers in most of the categories they operate in; but that cannot be taken as a benchmark. The story of banking, inclusion, and digitization is a long term story and investors must be prepared for the long haul. Finally, banking in India has gone through longer term cycles of boom and bust and that remains a macro risk for the fund.