What are Banking and PSU Funds

Banking & PSU Mutual Funds are open-ended debt schemes

These funds primarily invest in top AAA-rated bonds

These days Banking & PSU mutual funds are in the spotlight. In the last two years, cases of defaults and downgrades in the mutual debt fund and the Franklin fiasco have made traditional debt mutual fund investors extra risk-averse to preserve their capital. In this scenario, Banking & PSU funds have emerged as a new choice.

 What are Banking and PSU Funds?

Banking & PSU Mutual Funds are open-ended debt schemes that predominantly invest in debt instruments such as debentures, bonds, certificates of deposit of banks, public sector undertakings and public financial institutions. According to SEBI, a Banking & PSU fund has to invest at least 80% of its total assets in the public sector companies. These companies are usually large-cap and have AAA ratings from the country’s top credit rating agencies.

Because of the high quality of borrowers and the government ownership of most entities, the risk of default is significantly less, and investment experts consider this a safer investment. Nevertheless, they also might get affected if interest rates in the economy go up.

These schemes also have the option to invest in private banks. Since banks are under tight regulation, monitored by the Reserve Bank of India and the central government, they are relatively safer.

 Where do Banking & PSU Funds invest?

These funds primarily invest in top AAA-rated bonds and debentures of the debt market. Banks, PSUs and PFIs issued bonds and debentures include, for example, Export-Import Bank of India, Food Corporation of India, Gail, Indian Railway Finance Corporation, NABARD, National Highways Authority of India, NHPC, NTPC, Power Finance Corp and Power Grid Corporation of India.

 Banking and PSU fund – Performance History

In the recent times of highly volatile debt market and Covid 19 outbreaks, the category has fared better than most equity fund categories except a few sectoral mutual funds. As of 2019 end, the total assets under management(AUM) maintained by such mutual funds stood at Rs. 58,345 crores and in the last one year, returns generated at an average 11.05% on the total principal amount invested outperforming all debt fund categories as well, except long duration funds.

 Who should invest in Banking & PSU Funds?

If investors’ primary objective behind the investment is to preserve corpus, banking and PSU debt funds are ideal. However, the return may be lower than the return realized through equity tools.

These funds are relatively safer investment options for investors looking to park surplus funds. The ideal investment horizon is at least 2-3 years and more. Investors can realize gains through timely yields and also capital gains through increased NAV value on resale in growth options.

Investors can choose to allocate a part of the portfolio to the best banking and PSU debt fund besides putting their money in risky assets. It mitigates the risk factor considerably and provides considerable returns to compensate for risky investments.


Highly safe and Minimal Risks Associated

These funds comprise debt tools of public sector companies as well as top-performing banking organizations. Hence, the risks associated are minimal by nature. The corpus amount is secured by government-supported companies operating in one of the country’s major sectors and having high credit ratings determined by the top rating agencies.

Tax Benefits

Short term capital gains for investment held for less than three years are taxed as per the applicable slab rate. Assets held for over three years qualify for long-term capital gains tax of 20% with indexation benefit.


 Low Returns

The best banking and PSU debt fund primarily invest in large-cap companies’ debt securities where chances of a considerable increase in the prices of stock are negligible, and the probability of earning substantial market gains is less.

High NAV

These mutual funds are highly in demand because of their minimal risk factors. However, investors with a lower aptitude for risk might dilute their entire investment stock’s overall risk factor through debt securities. It will not only make the cost of investment substantial but also impose a financial burden on investors.

Short Investment Tenure

These funds have a short holding period ranging from 1 – 3 years, hence they are not an ideal instrument for securing long-term investment options.

In these kinds of funds, most borrowers are supported by the government or big banks, which means near-zero risk of non-payment. They also tend to give higher returns than Bank Fixed Deposits of a similar duration without taking a higher risk. If it sounds tempting, talk to your advisor now!

That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.

With this one can say “Mutual Fund Sahi hai”, so let me do Nivesh / Enquire