Thursday, 7 February 2013

Sector Snapshot - Banking Sector

When beginning to invest in equities and stocks, it is always helpful to have a rough framework against which you can decide where to invest. If you start looking into individual companies straightaway, it is difficult to put your investment decisions in the correct perspective. Instead, It is easier to decide, which sectors you want to invest in, and then zero-in on a good company in that sector.

Sector Watch :

When learning to invest in the stock markets, it is useful to get a broader picture of the sectors which are performing well and which can give good returns in the future. Then you can diversify your investments into different companies in the chosen sectors. It is similar to having a balanced diet to stay healthy. Your health depends on the intake of all the needed nutrients in the correct proportion. Identify the nutrients first and then select the food items which contain the nutrients. In the same way we select the sectors first and then identify the companies operating in the sector and showing good performance using the concepts already outlined in the Learn to Invest section. It is easy to build our portfolio of diversified stocks by planning it this way.

The Banking Sector :

In the spirit of what is said above we start by giving an overview of the banking sector in this post.

All economic activity in the country is directly linked to the banking system. The country’s growth in financial terms is funded to a major extent by the banking and non-banking financial companies.

The enormous funds provided by the banks to companies and organisations as loans, help the other sectors to grow and expand their business activities at an accelerated pace. Thus, banks are vital to the growth of the country as a whole.

The emphasis laid by the government on financial inclusion program, which envisions easy accessibility to banking services even in the remotest places, also is a testimony to the importance of banks as growth drivers.

The fact that banking sector has  25% weightage of the benchmark index Nifty50 is a reflection of the importance of the sector. The Nifty banking index consists of 12 private and public banks and any one of those banks can become our stock investment option after good study.

We have explained about the banking sector in detail in our post on The Business of Banking. Some of the parameters which are necessary to judge the various banks performance are discussed in The Fundamental Parameters of Banking.

It can be confidently stated that banking sector is one promising sector to include in our portfolio of stock investments.