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In many ways, money has been the engine of our civilization. As we learned how to make things, we learned to exchange them, and that exchange wasn't always equal. Once we figured out how to use currency, trade was born, and the rest, of course, is history.

Central to that history is banking. For where there is money, there are banks. Banks enable borrowing and the creation of debt. Debt accelerates growth, allowing entrepreneurs to start right now, without savings, and use this debt to fuel growth, upgrades, improvements, and anything else that boosts their earning potential. Growing businesses fuel a yearning for wealth creation, in turn spawning speculation and investments, and creating a flourishing financial services sector. The need to minimise risks then drives the creation of the insurance industry.

If money is the engine of our civilization, the BFSI sector is the lubricant that keeps everything smooth, protected and in peak condition. India has had a functioning banking system since as far back as the Mauryan period, around 300 BC, with deeds, bills of exchange, letters of credit and more. According to British economist, Angus Maddison India's share of the world income stood at a whopping 27% of global income in 1700 AD, compared to all of Europe's paltry 23%. This made us the world's largest economy then. Today, as we reclaim our position as one of the world's biggest economies, we can, once again, give credit to India's robust and high performing BFSI sector.

Besides being an enabler for growth, the BFSI sector itself is booming. It's no surprise that 46% of the world’s total digital transactions happen in India. Or that the share of financial services in India’s market capitalization increased from 6% in FY2001 to 24% in FY2021. India is the 9th largest life insurance market and ranks 14th in the non-life insurance business globally, and the market is expected to grow to USD 200 billion by as early as 2027. The rate of Fintech adoption in India is 87%, which is the highest globally.

Here's something that the investor in you should pay attention to: roughly 37% of the weightage of BSE Sensex is by businesses in the BFSI sector.

Banking on India

India's Banking sector is characterised by its stability, even during times of global upheaval. India is also home to some of the strongest technical innovations and disruptions the banking industry has seen: UPI and the recent launch of Central Bank Digital Currency are driving greater adoption that goes far beyond the metros. India focused solutions like digital lending, virtual KYC, one-click and instant loans have quickly become the new normal.

Walking arm in arm with banks are Non banking Financial Companies (NBFCs), bridging the gaps and serving the underserved populations, often in remote and rural areas where banks aren't as accessible. NBFC offerings include gold loans, affordable housing finance, microfinance, and more. NBFCs also expand the banking umbrella by extending financial support to those who fall outside the conventional eligibility criteria of banks.

Another India success story is the massive growth seen in the mutual fund industry's Assets Under Management (AUM). Indian investors start early - thanks to the steady drum beat of messaging from the industry as well as their own families. Indian retail investors have the advantage of asset management companies that facilitate their entry into equity with investments as small as Rs 100.

The financial services industry, backed by a plethora of apps and fintech innovations, has smashed through barriers to entry for the Indian investor - no matter how old they are, where they live, and how little they understand technology, or how small their investment is. In fact, today there is growing demand from investors for newer financial products like P2P lending, financial planning, portfolio management services, stock advisories etc. due to rising investment awareness and easy access through digital means.

Insurance has traditionally been a strong sector for India given that it began as a way to create pensions for the struggling middle class in post independence India. Regulatory changes like mandatory motor insurance have also driven demand, in addition to new segments like cyber insurance and crop insurance.

Bullish on BFSI

The BFSI sector has significant tailwinds for growth due to themes like financialization of savings, digitalization, urbanisation and government support for programs like Make in India.

UPI transactions crossed the 100-billion mark in 2023. In fact, the value of transactions stood at around Rs 182 lakh crore in 2023, a growth of 44% as compared to the preceding year. Indian bank credit is growing at 16%, faster than the GDP growth of 9 percent, implying a credit multiplier of 1.7x. NBFCs too, have seen their AUMs grow from just under USD 49 billion in March 2008 to a projected USD 416 billion in March 2024.

Traditional banking aside, the digital lending market has seen an impressive 39.5% CAGR over the last 10 years and is set to grow from $270 billion in 2022 at a CAGR of 22% 2030 to become a $1.3 trillion market opportunity in 2030.

The insurance sector, too, is on a meteoric growth path. India's growing middle class, increased risk awareness post-Covid and rising incomes are driving demand for life insurance. Life insurance industry recorded a total written premium income of $91 Bn (INR 6.93 lakh Cr) in FY 22, registering growth of 10.2% over FY 21. The sector is worth Rs.70,000 Cr in premiums annually and growing at 17%. Moreover, Insurtech is driving innovation through digital platforms, AI-based underwriting and faster claims, making further inroads in market penetration and breaking barriers to entry.

Non-life insurance, including health, motor, property, etc are also seeing an upward surge. It is expected to increase by 14-15% in gross direct premium income (GDPI) until FY37. This is one area where govt schemes are driving growth: crop insurance is a major segment backed by Pradhan Mantri Fasal Bima Yojana; health insurance is supported by government schemes like Ayushman Bharat and CGHS; and motor insurance is growing due to mandatory vehicle insurance regulations. Cyber insurance is another fast growing segment due to rising cyber threats and a population that lives increasingly online.

If you live in India, if you have Indian friends and neighbours, you know we take our investments seriously. BSE-registered investor accounts reached a landmark of 10 crore on March 16, 2022. Of these, a whopping 60% have been registered in just the last 3 years. Mutual Fund AUM tops Rs 50 trillion for the first time this month.

Groww with BFSI

India is investing in its own growth, and BFSI is a very important element of that story.

Groww Mutual Fund is giving investors a boost on the booming Indian banking and financial services (BFSI) sector with their new equity fund. The NFO (New Fund Offer) opened on 17 January 2024 and will close on 31 January 2024. Investment starts at just Rs. 500, allowing even small investors to position themselves for potential long-term growth.

This fund focuses on equities and equity-related securities of companies engaged in the financial services sector, with up to 20% in other sectors for diversification. It also explores debt, REITs, and derivatives for strategic advantage. Suitable for investors with a 5-10 year investment horizon, it offers potential for long term capital appreciation.

The growth potential here is immense. Even with the numbers we're seeing, a large portion of India's population remains uninsured or underinsured. Compared to global averages, India's mutual fund AUM is still low. Moreover, only 14% of India's HNI wealth is under formal wealth managers.

Groww's SMART Portfolio construction framework for BFSI is another reason for consideration. Within BFSI, different sub-sectors are at different stages of growth, and have outperformed the market at different points in time. Sub-sector diversification creates a larger net to catch these highs. On the flip side, there are low returns correlations across banking, wealth and insurance, which means that the same market fluctuations and disruptions will not impact all of these sub-sectors the same way. Multi-cap diversification further allows the fund to identify and invest in growth opportunities without a market cap bias. The fund is designed to be Adaptive to the macroeconomic environment, and Real Time assessment and decision making adds to its nimbleness.

With India's BFSI sector poised for exciting growth, this could be the chance to ride the wave. Learn more about Groww Banking & Financial Services Fund here.

Disclaimer: Investors should consult with their financial adviser before investing.