What Are Banking & PSU Funds?
Banking & PSU Funds are debt mutual funds that invest at least 80% of their assets in debt instruments issued by banks, public sector undertakings (PSUs), and public financial institutions. These funds invest in bonds, certificates of deposit, and other debt securities issued by these entities, offering a balance between safety and returns. Banking & PSU Funds are suitable for investors seeking moderate returns with lower credit risk than corporate bonds. They provide exposure to high-quality debt instruments issued by entities with strong credit profiles and government backing, making them relatively safer than pure corporate bond funds.
Key Features of Banking & PSU Funds
80% Banking & PSU
Invest at least 80% of assets in debt instruments issued by banks, PSUs, and public financial institutions.
Lower Credit Risk
Lower credit risk than corporate bonds due to high credit quality and government backing of issuers.
Moderate Returns
Typically provide 6-7.5% returns, balancing safety and returns for conservative investors.
Diversification
Provide diversification across banks, PSUs, and public financial institutions, reducing concentration risk.
Eligible Issuers
| Category | Examples | Credit Quality |
|---|---|---|
| Banks | SBI, HDFC Bank, ICICI Bank, Axis Bank | AAA to AA+ |
| Public Sector Undertakings (PSUs) | ONGC, NTPC, Power Grid, GAIL, IOCL | AAA to AA+ |
| Public Financial Institutions | NABARD, SIDBI, EXIM Bank, IIFCL | AAA to AA+ |
| Municipal Bonds | Bonds issued by municipal corporations | AA to AA+ |
Benefits of Banking & PSU Funds
Lower Credit Risk
Invest in high-quality debt instruments issued by banks, PSUs, and public financial institutions with strong credit profiles and government backing, reducing default risk.
Moderate Returns
Provide 6-7.5% returns, balancing safety and returns, making them suitable for conservative investors seeking moderate growth.
Diversification
Provide diversification across banks, PSUs, and public financial institutions, reducing concentration risk and improving risk-adjusted returns.
Tax Efficiency
Long-term capital gains (3+ years) taxed at 20% with indexation benefit, which can significantly reduce tax liability compared to fixed deposits.
Risks and Considerations
Interest Rate Risk
NAV fluctuates with interest rate changes. When rates rise, bond prices fall, and vice versa. Longer duration bonds are more sensitive to rate changes.
Credit Risk
While lower than corporate bonds, banking & PSU funds still carry some credit risk. Defaults by banks or PSUs, though rare, can impact returns.
Returns Not Guaranteed
Returns are market-linked and depend on interest rates, credit quality, and market conditions, which can fluctuate over time.
Liquidity Risk
Some debt instruments may have lower liquidity, making it difficult to sell at fair prices during market stress or redemption pressure.
Who Should Invest in Banking & PSU Funds?
Moderate Return Seekers
Ideal for investors seeking moderate returns (6-7.5%) with lower credit risk than corporate bonds, balancing safety and returns.
Low to Moderate Risk
Suitable for investors with low to moderate risk tolerance who prefer lower credit risk than corporate bonds while accepting some risk for better returns.
Medium to Long-term
Best for investors with medium to long-term investment horizons (3-5 years) to benefit from compounding and tax efficiency.
Balance Seekers
Perfect for investors looking for a balance between safety and returns, offering better returns than government bonds with lower risk than corporate bonds.
Final Thoughts
Banking & PSU Funds offer a balance between safety and returns. They invest at least 80% in debt instruments issued by banks, PSUs, and public financial institutions, which typically have high credit ratings and government backing. This results in lower credit risk than corporate bonds while offering better returns (6-7.5%) than government bonds. The funds are suitable for investors seeking moderate returns with lower credit risk than corporate bonds. They provide exposure to high-quality debt instruments with strong credit profiles, making them relatively safer than pure corporate bond funds. However, they still carry interest rate risk, which affects NAV when interest rates change. For risk-averse investors seeking minimal credit risk, government bond funds (gilt funds) may be more suitable, while for those seeking higher returns, corporate bond funds may offer better opportunities.