Want exposure to India's biggest banks? Zerodha launches new ETF

The index includes both private and public sector banks, with constituent weights reflecting their relative size, subject to applicable limits.According to Zerodha Fund House, India has 41 listed banks, and the 10 banks represented in the index account for approximately 89% of the free-float market value of the banking sector. The ETF allows investors to gain exposure to this basket without having to purchase each bank's shares individually.Banking sector's role in economic growthLive EventsBanks play a key role in financing India's economic activity by providing credit to businesses and individuals.

According to the fund house, bank lending to sectors such as agriculture and allied activities, industry, services and personal loans has grown year on year in recent years.The ETF is designed for investors who want to take a focused exposure to the banking sector as part of their investment portfolio. Since the scheme tracks a sector-specific index, its performance will depend on the performance of the underlying banking stocks and the broader banking industry.The fund house also noted that several major banks in the index are trading below their respective five-year average price-to-book value ratios.The price-to-book ratio compares a bank's market valuation with its book value, making it one of the metrics investors use to assess banking stocks.

However, a valuation below the historical average does not necessarily mean a stock is undervalued or that its price will rise.Commenting on the launch, Vishal Jain, CEO of Zerodha Fund House, said banks support India's economic growth by providing credit and enabling payments across the economy. He added that the ETF offers investors a transparent way to invest in India's largest banking stocks through a single fund.How to invest in the Zerodha BSE Top 10 Banks ETFDuring the NFO period, investors can subscribe through Coin by Zerodha and MyCAMS.

After the scheme is listed on the stock exchanges, investors will be able to buy and sell its units during market hours through a stockbroker using a demat account. The minimum exchange-traded purchase will be one unit, subject to the scheme's listing and trading arrangements.The ETF may be suitable for investors with a long-term investment horizon who want to add a dedicated banking allocation beyond their core portfolio.

However, because it concentrates on a single sector, it carries sector-specific risks and may be more volatile than a diversified equity fund.Taxation of ETF investmentsAs outlined in the fund house's announcement, gains on units held for up to one year are classified as short-term capital gains and taxed at 20%, plus applicable cess and surcharge.Gains on units held for more than one year are classified as long-term capital gains, with gains of up to Rs 1.25 lakh in a financial year exempt from tax and gains above that threshold taxed at 12.5%, plus applicable cess and surcharge.Investors should consult a tax adviser regarding the tax treatment applicable to their individual circumstances.Disclaimer: The Zerodha BSE Top 10 Banks ETF provides exposure to a concentrated basket of banking stocks and does not guarantee returns.

Investors should review the scheme information document and assess their risk appetite, investment horizon and existing portfolio allocation before investing.(You can now subscribe to our ETMarkets WhatsApp channel)