DSP Mutual Fund's Preethi R S remains constructive on India's financial sector, favouring lenders with strong deposit franchises, disciplined underwriting, and consistent execution. India's credit-to-GDP ratio remains well below that of major Asian and developed economies, leaving structural room for credit penetration as household savings shift from physical assets toward formal financial products. She identifies healthy retail and SME credit demand, an early recovery in corporate lending, and broad opportunities across banks, NBFCs, and non-lending financials as key themes driven by this long-term financialisation trend.

While credit growth remains healthy and asset quality is broadly benign, valuations and earnings trajectories vary sharply across lenders. Headline asset quality metrics are strong, though concerns persist around microfinance, unsecured consumer loans, and certain small-ticket lending segments — areas where the RBI raised risk weights in November 2023 to temper rapid growth. Whether credit costs are near a cyclical bottom — and which areas carry the greatest risk of negative surprises — remains a central question for sector investors.

Fund Composition and Diversification

Banks account for approximately 47% of the DSP Banking & Financial Services Fund, while finance companies, insurance providers, capital-market businesses, and fintech firms make up a significant portion of the remainder. This diversification reflects an effort to reduce dependence on the banking and interest-rate cycle, an approach that gained relevance through 2023-24 as rate-sensitive segments diverged in performance.

ICICI Bank and Axis Bank are the fund's two largest holdings, while HDFC Bank and Kotak Mahindra Bank carry comparatively smaller weights. The differentiation in conviction across large private banks may reflect factors such as deposit growth, return on assets, credit costs, management execution, or valuation. Deposit growth has become an increasingly critical differentiator across Indian banks, as credit expansion outpaced deposit accretion through much of the recent cycle, intensifying competition for retail savings and pushing up the cost of funds.

The portfolio also includes positions in PSU banks, small finance banks, and regional lenders. For smaller or state-owned banks, considerations around governance, liquidity, and concentration risks are central to the investment decision.

NBFC Exposure and Competitive Positioning

Cholamandalam Finance, Shriram Finance, and Bajaj Finance are among the fund's major NBFC holdings. With banks competing aggressively for retail borrowers, NBFCs' structural advantages in specific lending segments — such as vehicle finance, used-asset lending, and underserved geographies — remain a key area of focus, alongside monitoring of potential warning signs that could warrant reduced exposure.

Wealth Management and Capital Markets

The fund is also positioned around the wealth management and capital market growth cycle, with attention to valuations in wealth management and brokerage stocks as part of the broader investment framework. India's expanding retail investor base, rising demat account openings, and growing systematic investment plan (SIP) flows have supported revenue growth for capital-market intermediaries, though valuations in some of these businesses have risen alongside that momentum.

Source: Economic Times Markets