January 12, 2026
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In an exclusive interaction with Nilesh Jethani, Fund Manager at Bank of India Mutual Fund, we decode the investment philosophy behind the Bank of India Banking & Financial Services Fund NFO. Mr. Jethani shares sharp insights on managing concentration risk in a benchmark-heavy sector, maintaining valuation discipline across credit cycles, and balancing exposure between PSU banks, private banks, NBFCs and emerging financial segments. He also explains how risk is managed in a Very High Risk sectoral fund and clarifies the role this BFSI-focused strategy should play in an investor’s overall portfolio, especially amid India’s accelerating financialisation trend.
– By Jainee Shah, Director, Chanakya Mediahouse Pvt. Ltd. SEBI Registered Research Analyst, Chartered Accountant
1️⃣ Portfolio Construction & Concentration Risk
The NIFTY Financial Services TRI is heavily skewed towards a few large private banks. How do you plan to manage concentration risk in the fund—will you actively diversify into NBFCs, insurance, exchanges, or PSU banks to reduce dependency on top two holdings?
Answer – While the NIFTY Financial Services TRI is skewed towards a few large private banks, our portfolio construction is benchmark-aware but not benchmark-driven. We actively manage concentration risk by diversifying across NBFCs, insurance, capital markets, asset managers, exchanges and select fintechs. Within banks, any overweight is likely to be towards well-capitalised PSU banks benefiting from improving ROE and balance sheets. Allocation decisions are driven by execution quality, cash-flow resilience and valuations rather than index weights. A market-cap agnostic, top-down and bottom-up approach is likely to help enhance diversification and risk-adjusted returns.
2️⃣ Valuation Discipline Across Cycles
With financial stocks currently trading at around 18x P/E, how do you assess valuation comfort versus earnings sustainability? What signals would prompt you to reduce exposure during a credit or regulatory down-cycle?
Answer – At ~18x P/E, we believe valuation comfort should be assessed through sustainability of ROE, credit costs, capital adequacy and earnings visibility rather than headline multiples. We believe strong balance sheets, decade-low NPAs and improving profitability support current valuations. Exposure would be reduced if early stress signals emerge such as rising slippages, margin compression, aggressive underwriting, regulatory tightening impacting ROE, or weakening capital buffers during a credit down-cycle.
3️⃣ PSU Banks vs Private Banks Strategy
Given your exposure options across PSU banks, private banks, and NBFCs, what will be the key differentiators driving allocation decisions—ROE trajectory, asset quality, capital adequacy, or government policy support?
Answer – Allocation across PSU banks, private banks and NBFCs will be driven by a combination of ROE trajectory, asset quality, capital adequacy and valuation comfort. We expect to remain relatively overweight on PSU banks, supported by significantly improved balance sheets, decade-low NPAs, strong capital adequacy and attractive valuations despite rising ROEs. NBFCs are likely to be another area of overweight, given their faster growth, structural NIM expansion and ability to address niche credit demand. Private banks will be selectively owned, with emphasis on execution quality and risk discipline.
4️⃣ Risk Management in a Sectoral Fund
As this is a Very High Risk sectoral fund, what internal risk controls or guardrails do you follow to protect investors during periods of sharp drawdowns in financial stocks, such as liquidity stress or macro shocks?
Answer – While the fund is classified as Very High Risk, we believe risk management starts with portfolio construction. Historically, Nifty Financial Services has delivered higher returns with lower volatility on a risk-adjusted basis over the last decade. We invest in a diversified basket of compounders—typically large banks and NBFCs with stable ROEs and strong cash flows—blended with innovators such as fintechs and fast-growing segments like capital markets, wealth management and insurance companies. This balanced mix helps cushion drawdowns during liquidity stress or macro shocks while preserving long-term return potential.
5️⃣ Role of This Fund in an Investor’s Portfolio
Who should ideally invest in this fund—core long-term investors or tactical allocators? What minimum investment horizon do you recommend for investors to truly benefit from the financial theme?
Answer – This fund is best suited for investors with a long-term, high-risk appetite who already have a diversified core equity portfolio. We believe the BFSI theme has a long structural runway and as India’s financialisation is accelerating—mutual fund AUM, insurance penetration, demat accounts and digital payments are growing at a pace well ahead of nominal GDP. Over the next 2–3 years, financials, especially banks, are at a favourable crossover of attractive valuations and strong growth driven by margin recovery and healthy balance sheets. The fund is not meant to replace core equity exposure, but to serve as a tactical, high-conviction alpha sleeve. A minimum investment horizon of five years is recommended to benefit across cycles.