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Market Insights6 Mins Read

Bank Bees vs. Nifty Financial Services Index – Which Is Better?

bank-bees-vs.-NIFTY-50-comparison

Around the world, stocks from the Banking and Financial Services sector comprise a huge part of any investor’s portfolio. People treat them as good stocks offering growth and lower risk as compared to other sectors. Traditionally, in India, banks and financial institutions have been the guardians of our life’s savings (think fixed deposits), offering reasonable returns.

As an investor, who started his investment journey way back in 2003, I have seen the demand for various new sectors rise and fall. However, bank and financial services stocks are always in demand – they are the lifeline of most markets around the globe. The sector comprises both banks and other financial institutions like insurance companies, housing finance companies, and other NBFCs (non-banking financial institutions).

However, for most investors, this sector merely signifies banking stocks. In this article, I will talk about my experience with the Bank Bees and Nifty Financial Services Index and talk about how to determine which option to choose and when.

Banking & Financial Services Sector

The NIFTY 50 Index offers an overview of the performance of 13 sectors of the economy and around 65-70% of the market capitalization of stocks listed on the National Stock Exchange (NSE), has 10 stocks (around 20%) from the Banking and Financial Services Sector.

Here is a sector-wise break-up of the Nifty 50:

NIFTY-50-NIFTY-BeEs-sectors
Source: Worldmarketlive.com

The weightage of stocks of the different stocks (as on January 17, 2020) is as follows:

sector-weightage-nifty-50-latest
Source: Niftyindices.com

As you can see above, the index has a maximum focus on the Financial Services sector followed by Energy and Auto. While the numbers might be different, and the second and third places would have changed, the top spot has more or less remained with the financial services sector for as long as I can remember.

Earlier this year, when I was contemplating diverting a part of my portfolio to passive investing instruments, like ETFs or Index Funds, I started studying the performance of indices and various sectors that they represent. When I was researching the financial services sector, two indices caught my attention:

  1. Nifty Bank Index
  2. Nifty Financial Services Index

The performance of the stocks in these indices was promising and I started looking for instruments that offered passive investments that tracked each of them. After a lot of research, I finalized these two instruments:

  1. Bank BeEs ETF that tracks the Nifty Bank Index
  2. India BFSI Kristal – a stock basket that tracks the performance of Nifty Financial Services Total Return Index

So, when it came to making a choice I didn’t want two passive investment instruments tracking the financial services sector in my portfolio! Any investor who researches and makes investment decisions based on analysis and statistics would be aware that comparing two similar investment options is never easy. Since each can offer its own pros and cons, the decision usually relies on personal preferences – more than the numbers.

Below, is my analysis.

Bank BeEs ETF and India BFSI Kristal

Bank BeEs (Benchmark Exchange-Traded Scheme) is an exchange-traded fund (ETF) that tracks the performance of the Nifty Bank Index. This index comprises stocks of 12 banks from the public and private sectors. The weightage of stocks of the different banks (as on January 17, 2020) is as follows:

bank-wise-weightage-nifty-50
Source: Niftyindices.com

India BFSI Kristal is a stock basket offered by Kristal.ai that tracks the performance of Nifty Financial Services Total Return Index. This index comprises stocks of 20 banks and financial institutions from the public and private sectors. The weightage of stocks of the different stocks (as on January 17, 2020) is as follows:

sectoral-weightage-nifty-50
Source: Niftyindices.com

One thing was clear – banking stocks were important for earning good returns from the financial services sector – the writing was on the wall.

However, which was the better option for me?

Choosing Between Bank BeEs and India BFSI

Since you are halfway through the article, I am assuming that you want to gain exposure to the financial services sector of the stock market via passive investing instruments. The way I see it, the biggest differentiator between the two instruments is the answer to a simple question:

“Do I want to invest in the broader financial services sector or stick to banking stocks since they represent a major portion of the sector?”

Bank BeEs ETF is about banking stocks. Hence, by investing in Bank BeEs, you add a focused passive investment instrument to your portfolio that has its eyes set on the stocks of major banks. By doing so, you are not investing in other financial stocks like insurance companies, housing companies, and other NBFCs. Also, if a policy change or a macroeconomic situation forces the banking stocks to plummet, your returns can take a hit – the perils of having a super-focused investment approach.

On the other hand, the India BFSI Kristal is about investing in the overall financial services sector. It allows you to benefit from all the positive changes in the sector while hedging against possible losses in one sub-sector.

Just to give you an idea, here is a quick look at the performance of both these instruments:

India-BFSI-Kristal-versus-Bank-BeEs
India BFSI Kristal versus Bank BeEs

When to invest in which instrument?

Only if I had a simple answer to this question…! But, here’s my perspective:

2019 was a tough year for markets in India. We suffered from a bad monsoon, rising prices, and global socio-political dampeners (like the US-China trade war) which contributed to an overall slowdown of the Indian economy. With the Budget 2020 around the corner, I expect the government to provide the required impetus to the economy to help it revive and prosper again. And, when the economy is reviving, there is no better place to be than in the driver’s seat – the financial services sector. While there is no debate about the fact that in the long-term, this sector grows with the economy of the country, keeping a close eye on the current macroeconomic conditions can help you determine the right time to invest.

How you select between the two instruments can depend on various factors. Some investors choose Bank BeEs simply because they believe that the banking sector is the strongest in the country and they don’t want to dilute their investment by adding non-banking companies to the list. On the other hand, some investors believe in a diversified portfolio (my preference too) and opt for the India BFSI Kristal which offers a balanced approach to the sector.

Summing Up

Summing Up

Making investment decisions requires a clear understanding of your preferences, strong research about the options available to you, and creating a portfolio that works for you. An aspect that cannot be ignored is the current composition of your investment portfolio. Are you already heavily invested in banking stocks? Or, do you own a few NBFC stocks? At the end of the day, your investment portfolio needs to be diverse, balanced, and work towards your financial goals.
The India BFSI Kristal is a customized basket of stocks that uses the most representative companies in the financial services sector in India. The company uses its proprietary algorithm to create a portfolio that closely tracks the Nifty Financial Services Total Return Index. This algorithm endeavors to minimize the tracking error and uses a Genetic Algorithm for the same.
India is developing and in a developing economy, the financial services sector can have unpredictable growth. Hence, investing in this sector seems like a logical decision to me. Ensure that you assess all aspects before investing. Good Luck!

Disclaimer

This blog article has not been reviewed by the MAS. It is prepared solely for information purposes and does not constitute an offer or solicitation for the purchase or sale of units in the funds. This does not constitute any form of investment advice and Kristal Advisors (SG) Pte Ltd does not take into account your personal investment objectives, specific investment goals, specific needs, or financial situation and makes no representation and assumes no liability to the accuracy or completeness of the information provided here. The information and publications are not intended to be and do not constitute financial advice, investment advice, trading advice or any other advice or recommendation of any sort offered or endorsed by Kristal Advisors (SG) Pte Ltd.

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