The last three quarters have seen profit growth slowing sharply for many companies. Stock markets have swiftly derated those where valuations don’t match their growth metrics. However, today, financial services firms trade below their long-term averages in terms of valuation despite delivering better growth than most other sectors. This makes it a good time for investors looking for returns with strong downside protection, to buy Invesco India Financial Services Fund, a fund that has aced this category.
Why financial services
There are five reasons to bet on the financial services theme at this juncture.
One, credit lubricates the wheels of economic activity and growth for financial services firms moves in lockstep with GDP. India’s GDP growth is expected to stage a rebound in FY26 after a muted FY25 dampened by elections and inflation. Substantial tax cuts in the Budget and rate cuts by the Monetary Policy Committee (MPC) are expected to provide a kicker to consumption in the year ahead. This is likely to improve credit demand, aiding topline growth for lenders.
Two, in FY25, regulatory curbs on credit and the rising cost of funds acted as spokes in the wheel for lenders. Bad loan problems in microfinance and unsecured loan books also weighed on stock valuations. Recently, a change of guard at RBI has seen some regulatory curbs (such as the Liquidity Coverage Ratio for banks) being eased. MPC opening the taps of liquidity and cutting rates, promises to lower the cost of funds. Bad loan problems are restricted to select pockets which can be avoided by investors.
Three, apart from large banks and NBFCs which offer pockets of value, the financial services space in India also includes high growth opportunities in sectors such as life and health insurance, capital market institutions such as depositories, registrars and transfer agents, asset management companies and wealth managers, etc. Stocks belonging to the capital market ecosystem have been battered in the recent correction, but can rebound equally strongly if markets revive.
Four, banks and financial services occupy the largest weights in the bellwether indices; they have a 32.5 per cent weight in the Nifty100. As big index weights, financial services firms have high Foreign Portfolio Investor (FPI) ownership. They have thus borne the brunt of FPI selling since October 2024. FPI ownership of Indian markets is now at a decadal low. This suggests that financial services stocks can rebound if FPIs return to India. The uncertainty around Trump tariffs argues for focusing on sectors that are wholly reliant on domestic growth, like financial services.
Five, financial services offer an island of value in a steeply priced market. The Nifty Financial Services index trades at a Price-Earnings multiple of 15.5 times and Price to Book value of 2.8 times, compared to 20.6 times and 3.4 times for the Nifty100.
Why Invesco Financial Services
Launched in the immediate aftermath of the global financial crisis of 2007-08, Invesco Financial Services Fund is a good bet on this theme for the following reasons.
Category beater
In the 16 years since inception, Invesco Financial Services Fund has consistently fared better than the category. A rolling 1-year return analysis shows that the fund managed average returns of 20.3 per cent versus 17.1 per cent for the category since inception. With maximum returns at 155 per cent, it outpaced the category (138 per cent) in good times for the financial services theme. It also contained its losses to 32.6 per cent in its worst year, while the category lost 37.3 per cent. The fund managed a 20 per cent plus return about 45 per cent of the times while peers managed this 40 per cent of the times. The rolling 5-year metrics are equally good.
Less risky holdings
The fund’s latest portfolio (January 31 2025) shows large banks such as HDFC Bank, ICICI Bank, SBI etc making up 61 per cent, followed by capital market constituents such as HDFC AMC, CDSL, MCX at 14.8 per cent, with insurance (6.2 per cent) and fintech (3.1 per cent) taking up small weights. While large banks offer pockets of value, insurance stocks offer potential for rerating with ongoing insurance reforms. Capital market stocks are a high-beta bet on a market rebound. The fund doesn’t own material exposure to microfinance lenders or small finance banks, thus side-stepping asset quality issues that may worsen in the months ahead.
Contained risks
Financial services firms thriving as they do on leverage, are riskier than most other stocks. This is evident from thematic funds in this category delivering yearly losses about 26 per cent of the times in the last 16 years. Invesco Financial Services fared better with the loss probability at 24 per cent. The fund manages risk well compared to the category by reining in portfolio beta and standard deviation (0.9 and 4.2 per cent in January 31 2025) and keeping its churn at low levels (23 per cent). The fund is managed by Hiten Jain and Dhimant Kothari with 15-19 years of experience. The portfolio PE was at about 18 and price to book at 2.7 times.
Suitability
Financial services stocks can suffer higher losses than the market in a downturn. This fund is suitable only for investors with a high risk appetite. Both lumpsum and SIPs can be considered currently.
Why invest
Consistent on a rolling returns basis
Manages risks well compared to peers
Suited for SIPs and lumpsums currently
