Banking and PSU Mutual Funds

• Conservative or risk-averse investors looking for a comparatively safer mutual fund option in their portfolio can benefit from Banking & PSU funds. As they are not so market-volatile, they are perfect for investors who want ultra-short or short-term investments with minimal risk.
• Experienced investors well-versed with the stock market function can allocate a portion of their portfolio to the best Banking & PSU funds. If the investor pools money in risky assets, these investments can balance the risk factor to a great extent. In any unforeseen situation like a downtrend in the stock market, such an investment can deliver returns compensating for the losses or low returns associated with risky assets.
• These debt mutual funds are an ideal investment alternative for investors looking to put their surplus funds into a secure scheme to protect their portfolio while realizing considerable gains.
• Investors interested in high returns should go for this type of mutual fund. They deliver better returns than any traditional savings scheme, like a fixed deposit. However, the risk is also comparatively higher. These schemes also suit you if you search for investments with high credit quality and liquidity.

• At least 80% of the funds’ total assets are invested in debt securities issued by public financial institutions, public sector undertakings, and banks.
• Investments under the schemes are primarily debt instruments with lower maturity periods and higher liquidity.
• For the Banking & PSU funds, the investment is mainly in public sector banks operating under the government and are therefore safer than private sector banks and companies. Being backed by the government, there is also a repayment assurance for these funds.
• These mutual funds are influenced by market conditions and changes in interest rates, so investors looking for low-risk investment options can consider them based on these factors.
• Banking & PSU funds invest in debt and money market instruments issued by PSUs, PFIs, and banks with high credit quality. As the government is a significant shareholder of these entities, the funds enjoy Sovereign status and are free of credit risks. Banking funds enjoy high credit ratings as they are regulated and capitalized.

If the gains are withdrawn within three years of investing, short-term capital gains tax is levied according to the investor’s income tax slab. Indexation benefits apply to long-term capital gains and reflect the effect of inflation on the investment to bring down the overall gains and save on taxes.

However, banking & PSU funds are influenced by changes in interest rates. In simpler words, these schemes may not generate expected results if interest rates increase. Another limitation associated with these funds is that they have a short-term focus. As these schemes mature in 1-3 years, they are not great for long-term investments.

• High liquidity – These mutual funds focus on investing in highly rated categories which is why they become liquid in nature. They are short-term investment schemes with stable returns. The investor gets higher liquidity and is free to sell them in emergencies.
• High returns – Banking & PSU funds are known to generate better returns compared to fixed deposits or savings accounts. This is why they are ideal for investors looking for steady returns over a short horizon.
• Tax benefits – The profits earned from investing in Banking & PSU funds held for over three years count as long-term capital gains and are taxed at a 20% rate. However, if the investment is redeemed before three years, short-term capital gains apply and the earning is taxed according to the investor’s income tax slab.

Banking & PSU funds are, therefore an ideal investment option for:

• Low-risk appetite – These mutual funds carry a lower risk than most other schemes, so investors looking to add a safer fund to their portfolio can invest in them.
• Short-term investment goals – Banking and PSU funds generally have a maturity period of 1-2 years, so they are ideal for ultra-short to short or medium-term investment options.

Every investor must undertake proper research and analysis before choosing a fund to invest in. There are several factors one should consider while deciding on the best Banking & PSU funds for their portfolio. Let us discuss a few things you should remember.

• Fund performance – You should thoroughly research the fund’s performance before investing in it. A scheme that shows a consistent performance over time is more likely to ensure good returns.
• Financial goals – The choice of mutual fund schemes also depends on the investor’s financial goals. You must analyze and determine whether the fund’s investment objective aligns with your financial goals.
• Costs involved – Returns from mutual fund investments don’t come for free. Every investment has a cost, like the expense ratio, management fee, entry and exit load, and more. You must keep these costs in mind before choosing your funds.
• Fund house – As there are so many fund houses and management operating in the market, selecting a fund house with expertise is crucial to ensure that funds are rightly allocated. Expert fund managers can use their skills to steer your investments in the proper direction so that your portfolio can realize gains even during adverse market conditions.