You may have heard about investing in public sector banking stocks on the exchanges. However, if you wish to invest in them indirectly, PSU funds can be an option. However, first, you need to understand what banking PSU funds are, which we will cover in this article.
What Are Banking PSU Funds?
Banking PSU Funds are a category of debt funds. These mainly (approximately 80%) invest in debt instruments issued by banks, public sector undertakings (PSUs), and public financial institutions.
The features that make these funds stand out are:
- These funds are low-risk options and offer stable returns.
- Around 80% of the investment is in the debt instruments (AAA-rated) issued by financial institutions and PSUs.
- These funds offer liquidity to the investor.
- The tenure is usually medium to long based on investor preference.
Overall, these funds are a safe and reliable option for investors looking for investment in debt for diversification. Fund managers evaluate investment opportunities and manage the fund’s portfolio to align with market conditions.
Best Performing Banking PSU Funds in India
Various options are available for investing in banking and PSU funds. The top ones, based on their returns past 1-year returns as of July 2024, are listed here:
| Fund Name | AUM (in Cr.) | NAV (as of 10 Oct 2024) | 3 Year Returns |
| UTI Banking & PSU Fund Direct-Growth | ₹824 | ₹21.02 | 7.92% |
| ICICI Prudential Banking and PSU Debt Fund Direct-Growth | ₹8930 | ₹32.08 | 6.53% |
| Kotak Banking and PSU Fund Direct-Growth | ₹5,862 | ₹64.19 | 6.20% |
| ITI Banking and PSU Debt Fund Direct-Growth | ₹29 | ₹12.61 | 6.11% |
| Aditya Birla Sun Life Banking and PSU Debt Fund-Growth Direct | ₹9,342 | ₹358.60 | 5.94% |
Advantages of Investing in Banking PSU Funds
Now that you know what are banking PSU funds, let’s understand which advantages you can get by investing in them:
- Risk Reduction
Banking PSU Funds invest in debt instruments issued by established banks and public sector undertakings, entities known for their stability and government backing. This investment in lower-volatility securities helps mitigate capital risk, making these funds safer options than those involving high-risk securities.
- Credit Safety
The fund invests in instruments issued by banks and PSUs. These instruments are considered highly creditworthy due to their government backing and strong financial base. Thus, they reduce default risk, increasing the safety of investments in these funds.
- Regular Income and Stability
These funds are characterized by their ability to distribute regular interest income, deriving from stable and predictable revenue streams associated with the banking and PSU sectors. This regularity provides investors with financial stability.
- Ideal for Long-Term Investment Strategies
For investors with a long-term horizon, such as retirement planning or building an educational fund, these funds are helpful. Their inherent stability and lower risk profile make them suitable for achieving long-term financial objectives without the high volatility of equity markets.
Risks Associated with Banking PSU Funds
Though mutual funds invest in high-credit quality assets only, there are still a few risks associated. They are:
- Interest Rate Sensitivity
Like all debt funds, these funds are subject to interest rate risk, which can affect the fund’s asset value in the short term. When interest rates rise, the prices of existing bonds typically drop, which can decrease the fund’s overall asset value and impact short-term returns.
This inverse relationship between interest rates and bond prices is a key consideration for potential investors.
- Regulatory Risk
Any changes in government policies or regulations that directly impact the banks and PSUs will cause a fluctuation in the fund value.
Any adverse regulatory changes could impair the operational efficiencies or profitability of these entities, subsequently impacting issued securities and as a result, the fund’s performance and asset value.
- Credit Risk
Although investments are primarily in high-credit-quality assets, unexpected financial difficulties or credit rating downgrades of the issuers can still pose risks. For instance, a sudden financial crisis or mismanagement within a PSU could lead to reduced confidence and potential losses, affecting both the fund’s performance and investor returns.
Also Read: Types of Risks in Mutual Funds
Who Should Consider Investing in Banking PSU Funds?
The best-suited investor profiles for the banking PSU funds are as follows:
- Banking PSU funds are ideal for conservative debt investors looking for safe and reliable income in a volatile market.
- These are suitable for tax-savvy and yield-focused investors seeking steady income with low-risk exposure.
- Banking PSU funds offer stability and predictable returns for retirees or those nearing retirement.
- Investors looking for better returns than traditional fixed-income investments without significant risk can consider Banking PSU funds.
Conclusion
Banking PSU funds are a suitable choice for conservative investors seeking stable and reliable growth in the volatile market. These offer predictable and secure returns, which ensures the safety of capital.
Analyzing the financial goals and risk appetite before investing can help build a solid financial foundation for the future.
