NFO Pick – (DSP Nifty Private Bank Index Fund)

17 Feb 2025 , 09:16 AM

WHAT YOU MUST KNOW ABOUT DSP NIFTY PRIVATE BANK INDEX FUND?

The DSP Nifty Private Bank Index Fund is a passive fund designed to mirror the performance of the Nifty Privat Bank TRI (total returns index). The Nifty Private Bank Index is dominated by 4 banks; HDFC Bank, ICICI Bank, Kotak Bank, and Axis Bank with a combined weightage of around 82% in the overall banking index. The other 6 private banks in the Nifty Private Bank Index have a combined weightage of around 18% only.

Banking by default has been a game of size and dominance. If one looks at the US or Japanese banking experience; the banking leaders 20 years back, continue to be the banking leaders also. Hence, the scope for disruption of leaders in banking is quite low. In the last 20 years, Indian private banks have growth their market share of loans from 20% to 41%,while their market share of deposits has also gone up from 19% to 35%.

DSP NIFTY PRIVATE BANK INDEX FUND – INVESTMENT RATIONALE

Here are 5 reasons to invest in the DSP Nifty Private Bank Index Fund NFO from a longer term perspective.

• Private banks in India are in a balance sheet sweet spot. Capital adequacy (CRAR) at 16.9% is above the RBI mandate of 9%. Gross NPAs are just 1.9%, lowest in 30 years.
• Private banks are also in a profitability sweet spot. ROE at 15.9% is at a 25-year high, while return on assets (ROA) at 2.1% is nearly twice the 25-year average.
• Private banking index has consistently underperformed Nifty-50 since mid-2020, while the average Price/Book value at 2.69X is well below the 10-year average of 2.96X.
• There is a dichotomy in private bank valuations. They contribute 13% of profits but are just 8% of market cap. Their 10-year market cap CAGR is 300 bps below the profit CAGR.
• However, if you take a 20-year perspective, the CAGR returns on Private Bank index has outperformed the Nifty 50 index by 410 basis points.

What makes the Private Bank index attractive is that 8 of the 10 stocks in the index are trading below their historical 10-year P/BV ratio.

TWO POINTS TO REMEMBER ABOUT DSP NIFTY PRIVATE BANK INDEX FUND

When you invest in the DSP Nifty Private Bank Index fund, keep these in mind.

• While average CAGR returns on Private Bank Index have been higher than Nifty 50, the return range volatility is also much higher, opening the doors to sharper drawdowns.
• Since the Private banking fund is a play on relative undervaluation, lumpsum investing should work well. However, the SIP is also a good approach for long term investors.

GLANCE AT THE DSP NIFTY PRIVATE BANK INDEX FUND NFO

Here are key details of the DSP Nifty Private Bank Index Fund NFO.

• The NFO opened on February 14, 2025 and closes on February 28, 2025. Regular sale and repurchase of units at NAV linked prices will start within 15 days after closure.
• On the risk-o-meter, DSP Nifty Private Bank Index Fund is classified as “Very High Risk” due to its predominant equity exposure, and being a thematic private banking fund.
• Investment objective of the fund is to mirror the Nifty Private Bank TRI performance, adjusted for costs, while ensuring that tracking error is minimized.
• There is no entry load. Being an index fund, the AMC has also not set any exit load. Expense ratio for the fund will be 1.0% for Regular Plan and 0.4% for Direct Plan.
• DSP Nifty Private Bank Index Fund offers Regular and Direct plans as well as Growth and IDCW options to investors. Anil Ghelani and Dipesh Shah will be the fund managers.
• The minimum investment in the NFO, additional purchases, and the minimum monthly SIP instalment has been prescribed at just ₹100.
• DSP Nifty Private Bank Index Fund will be treated as an equity fund for tax purposes. STCG (less than 12 months) will be taxed at 20.4% (including cess). LTCG (over 12 months) will be taxed at 12.5%, with ₹1.25 lakhs base exemption per financial year.

The DSP Nifty Private Bank Index Fund offers a template for long term wealth creation through passive thematic exposure to private banks. Considering the under-pricing argument, one can look at lumpsum investments in the fund also. It continues to offer a good option for SIP structuring.