- How Much Do Mutual Funds Invest in Banks?
- Why Do Mutual Funds Invest in Banks?
- Final Thoughts
When you invest in a mutual fund in India, there's a good chance a large amount of your money is going into banking stocks. Many of India's most popular mutual funds have made a significant investment in the banking sector. This blog will explain the extent of their investment and the clear reasons behind this strategy.
How Much Do Mutual Funds Invest in Banks?
These are some mutual funds that have a significant portion of their money in the banking sector. This shows that fund managers are very confident about the future of these banks.
Here’s a look at the banking sector allocation in some well-known funds:
- HDFC Flexi Cap Fund: 35.08%
- Motilal Oswal Large Cap Fund: 24.8%
- Nippon India Large Cap Fund: 22.81%
- ICICI Prudential Large Cap Fund: 22.61%
- Parag Parikh Flexi Cap Fund: 19.81%
These funds primarily invest in a standard set of leading banks. The most frequently held banking stocks across these portfolios include HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank, State Bank of India, and Bank of Baroda.
Why Do Mutual Funds Invest in Banks?
Fund managers have good reasons for putting so much money into the banking sector. It's a calculated decision based on the improving financial health and profitability of these banks.
A Good Investment Opportunity
For the last three years, banking stocks have not performed as well as other sectors. For a fund manager, this can be a sign of a good opportunity. They believe the banking sector is now set for strong growth, prompting them to invest heavily in anticipation of this expected growth.
Healthy Banks Have Fewer Bad Loans
One key measure of a bank's health is its level of "Non-Performing Assets" or NPAs. An NPA is a loan that the borrower has stopped paying back. A low level of NPAs indicates that the bank is lending wisely and is financially strong. There are two ways to look at this: Gross NPA (the total value of bad loans) and Net NPA (the value after the bank has set aside money to cover these loans).
Most of the leading Indian banks are showing very healthy, low NPA figures. This makes them a more secure and attractive investment. Here are some examples:
- ICICI Bank: Reported a Gross NPA of 1.67% and a very low Net NPA of 0.41% as of June 30, 2025.
- Kotak Mahindra Bank: Had a Gross NPA of 1.48% and a Net NPA of just 0.34%.
- IDBI Bank: Showed a Gross NPA of 2.93% and a low Net NPA of 0.34%.
Banks Are Earning More Money
Another positive sign is that banks are becoming more profitable. They are earning more money year after year, which shows healthy growth.
Here’s how some of the top banks are performing:
- HDFC Bank: Saw its average deposits grow by 16.4% year-on-year. Its net interest income, a key profit indicator, grew by 5% year-on-year and by 10% in the March quarter.
- ICICI Bank: Its net interest income increased by a strong 10.6% year-on-year.
- Kotak Mahindra Bank: Its average deposits went up by 13% year-on-year.
- Axis Bank: Maintained a healthy Net Interest Margin (a measure of profitability) at 3.80%.
When banks are profitable and growing, their stock prices are likely to increase, which benefits the mutual funds that have invested in them.
Final Thoughts
The large investments by Indian mutual funds in the banking sector are not a random choice. It's a deliberate strategy based on solid evidence. After a few slow years, banks are now showing strong signs of health and growth. They have fewer bad loans and are earning more profits.
For anyone invested in these mutual funds, this focus on banking is a bet on the continued growth of the Indian economy. Since a strong banking sector is essential for a growing economy, this strategy could lead to good returns for investors.
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