How do banking and financial sector funds compare with diversified funds?

Banking and financial sector funds focus only on companies within the banking and finance industry, while diversified funds spread investments across various sectors like IT, FMCG, pharma, auto, and finance. Sector funds can offer higher returns during sector booms but carry more risk. Diversified funds provide more stability with moderate returns as they balance gains across sectors. Choose based on your risk profile, goals, and market outlook.

1. What Are Banking and Financial Sector Funds?

Banking and financial sector funds are mutual funds that invest primarily in stocks of companies in the banking, insurance, NBFCs (Non-Banking Financial Companies), fintech, and other financial service providers. These funds are classified as sectoral funds and aim to benefit from the performance of the financial sector.

These funds are best suited for investors who understand sector trends and are willing to take slightly higher risks for potentially higher returns.

2. What Are Diversified Mutual Funds?

Diversified funds, also known as multi-sector or multi-cap funds, invest across a wide range of sectors and industries. They include stocks from large-cap, mid-cap, and small-cap companies in various sectors like banking, technology, healthcare, FMCG, infrastructure, and more.

They are designed to reduce risk through diversification and offer stable returns even if a few sectors underperform.

3. Key Differences Between Banking Sector Funds and Diversified Funds

Let’s understand how these two fund types compare:

Feature	Banking & Financial Sector Funds	Diversified Funds
Focus	Only Banking & Finance companies	Multiple sectors across the economy
Risk Level	High (sector-specific)	Moderate (well diversified)
Return Potential	High during sector growth	Steady over long-term
Suitability	Aggressive investors with sector knowledge	All types of investors

4. Which One Is Better for You?

There is no fixed answer—it depends on your goals and risk-taking ability:

• Choose banking sector funds if you believe the financial sector will perform well in the coming years and you can handle short-term volatility.
• Choose diversified funds if you prefer stable returns, less risk, and a long-term wealth-building strategy without tracking sectors constantly.

A mix of both can also work well. For example, keep 80% in diversified funds and 20% in sector funds for a balanced yet aggressive portfolio.

5. Tax Implications and Holding Period

Both funds follow equity taxation rules. If held for more than 1 year, Long Term Capital Gains (LTCG) above ₹1 lakh are taxed at 10%. For shorter durations, gains are taxed at 15%.

So whether you invest in banking sector funds or diversified funds, holding them long-term is more tax-efficient.

When it comes to wealth creation, both banking & financial sector funds and diversified funds have their own benefits. If you’re a beginner or prefer lower risk, start with diversified funds. If you’re more experienced and optimistic about the financial sector’s growth, banking sector funds can offer excellent returns. Whichever path you choose, stay invested long-term and invest regularly via SIPs for the best results.