Every investor is looking for outperformance and consistent outperformance on exchanges. Given India’s growth and demographics, the financial services industry may offer such opportunities for investors.

Financial services, excluding banks, essentially refer to the financial services sector (such as insurance companies, NBFCs, etc.).

The Nifty Financial Services Index has historically outperformed the Nifty 50 Index over the long term. Over the past 10 years, the Nifty Financial Services Index has grown at a compound annual growth rate (CAGR) of 14.9% compared to the Nifty 50’s CAGR of 13.1%. Over the past 5 years, Nifty Financial Services and the Nifty 50 have grown at a similar CAGR of 12.7%.

Two heavyweight private banks (HDFC and ICICI) dominate the banking index, weighting with a combined share of almost 45%, thereby overwhelming the performance of other (financial) companies.

The Financial Services Index also outperformed Bank Nifty on a 5-year and 10-year basis, according to data from FinEdge.

To be sure, the financial services industry has some advantages over banking.

Banks, the cornerstone of any country’s financial system, are often (necessarily) more regulated and less willing to challenge the status quo with new products or distribution models. BFSI (ex-banking) firms are better equipped to specialise and occupy market niches.

By the way, most of the NBFCs in the pre-financial services banks are systemically important NBFCs, i.e. they have an asset size above Rs 500 crore, and they have additional regulatory requirements as per RBI.

Insurance companies are regulated by the Insurance Regulatory and Development Authority (IRDAI) and therefore have different operating parameters than banks, translating into various exchange performances.

Individual investors can enter the industry from the investment perspective through different methods such as direct investment, MF, and ETF.

Experts advise on the suitability of each model.

Analysing financial services companies can be complicated due to the regulated and complex nature and the large amount of debt in the capital structure. According to experts, this could make it difficult for individual investors to evaluate and invest in respective financial services companies properly.

ETFs provide a diversified way to invest in the financial services industry, allowing investors to gain exposure to a wide range of companies within the industry without analysing each company individually. Many mutual funds may also invest heavily in financial services companies due to their weighting in the broader index.

This is especially the case with index funds, which are designed to replicate the performance of a particular index and, therefore, can have significant implications for financial services. Investors should understand their mutual fund and ETF holdings to ensure they are comfortable with their exposure to financial services.

Experts recommend investing no more than 10% of your investment funds in financial products, assuming you have Rs 10 lakhs to invest.

Up to 5% of the investor’s long-term (7+ years) targeted investment can be invested in financial services (except banking), preferably through a SIP (Systematic Investment Plan) or STP (Systematic Transfer Plan). If the economy performs well, the industry will continue to do well.

Although the penetration rate of some financial services, products and insurance in India has increased significantly in recent years, there is still a lot of room for growth in many areas, which is another positive factor for the financial services industry.