Banking and PSU Funds

What are Banking & PSU Funds?

Banking and PSU Funds are investment vehicles that are safer than other types of mutual funds. These are open-ended debt mutual fund investment schemes that stand out from others owing to their investment pattern. These funds invest a minimum of 80 percent of assets in public financial institutions, banks, and PSUs (public sector undertaking) debt securities.

These mutual fund schemes generally invest a large part in debentures, bonds, and certificates of deposits issued by public sector banks working under the government. The focus is to invest in debt instruments with a low maturity period and high liquidity. These funds are ultra-short or short to medium-term investments with a lower risk than traditional debt funds.

While these schemes are much safer than private sector undertaking, it should be noted that they are not entirely free of risk. The funds also have the potential to offer high returns, but it depends on the market conditions. This means they are suitable for investors with a low-risk appetite, but it is essential to keep in mind the market volatility and your financial goals before investing in them.

Who Should Invest in Banking & PSU Funds?

Banking and PSU funds are short-term investments considered to be on the safer side as compared to regular debt schemes. These funds are suitable for these types of investors:

  • 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.

Features of Banking & PSU Funds

The SEBI introduced Banking & PSU fund category a few years back. These are debt schemes that mainly invest in government-backed banks and PSUs. Let’s look at the main features of Banking & PSU funds-

  • 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.

Taxability of Banking & PSU Funds

Banking & PSU funds are taxed according to the taxation rules that apply to debt funds. If investments are held for over three years, the earnings are considered long-term capital gains and attract a tax of 20 percent.

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.

Risk Involved with Banking & PSU Funds

Banking & PSU funds invest in debt securities of businesses operating under the public sector and high-performance banking organizations. The risks associated with such investments are minimal because the government backs the amount. Moreover, debt funds are low-risk in nature as compared to equities.

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.

Advantages of Banking & PSU Funds

Following are the primary benefits associated with Banking & PSU funds.

  • Low risk – As these investments are short-term, the market volatility does not affect the returns, making them ideal for investors looking for low-risk options. While they are not entirely free of risk, they carry lesser risk than other debt funds.
  • 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.

Who are these Funds Suited for?

Public sector undertakings and centralized banks are government-backed, so they have a minimum risk. Moreover, as this scheme largely focuses on debt securities, the risk factor is lower than equities as they are a liability to the issuing company. Banks and PSUs should pay interest to debenture holders before distributing profits among shareholders.

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.

Best Banking & PSU Funds in India

Let’s take a look at the top Banking & PSU funds available in India in 2022-

Axis Banking & PSU Debt Fund

Axis Mutual Fund launched this debt scheme in 2013 to suit investors looking for a low-risk, high-return mutual fund option focusing on debt securities. The scheme currently has assets under management worth INR 13,872 crores and an expense ratio of 0.34%. The fund has been providing consistent performance since its inception and doubles the invested money every nine years.

Minimum Investment:

  • INR 5000 for lumpsum
  • INR 1000 for SIP

Fund Performance: Since inception, the fund has delivered average annualized returns of 7.97%. Its returns for the last year are 3.23%.

SBI Banking and PSU Fund

This mutual fund scheme from SBI Mutual Fund was started nine years ago. It currently manages assets worth INR 5731 crores. Its expense ratio is 0.35% which is quite similar to other funds. It aims to deliver consistent returns over the short term through investments in debt securities issued by banks, PSUs, and PFIs. The fund’s top holdings are in SBI, GOI, Hindustan Petroleum Corporation, etc.

Minimum Investment:

  • INR 5000 for lumpsum
  • INR 500 for SIP

Fund Performance: Since inception, the fund has delivered average annualized returns of 8.03%. Its returns for the last year are 2.16%.

IDFC Banking & PSU Debt Fund

This banking and PSU, mutual fund scheme is a medium-sized fund in the category. Its current AUM is worth INR 15,787 crores, and the expense ratio stands at 0.32%. The scheme aims to deliver capital growth through investments in debt instruments issued by PFIs, PSUs, and banks. Some of the top investments of the fund include RBI, HDFC Bank Ltd., and Bank of Baroda.

Minimum Investment:

  • INR 5000 for lumpsum
  • INR 1000 for SIP

Fund Performance: Since inception, the fund has delivered average annualized returns of 7.9%. Its returns for the last year are 2.94%. It doubles the invested money every ten years.

ICICI Prudential Banking and PSU Debt Fund

A good banking and PSU mutual fund scheme from ICICI Prudential Mutual Fund, this debt fund was started in 2013 and had been performing consistently well since then. It currently manages assets worth INR 8186 crores and has an expense ratio of 0.35%. The scheme’s top holdings are Kotak Mahindra Bank, HDFC Bank, Indian Oil Corporation, etc.

Minimum Investment:

  • INR 5000 for lumpsum
  • INR 1000 for SIP

Fund Performance: Since inception, the fund has delivered average annualized returns of 8.29%. Its returns for the last year are 3.89%.

HDFC Banking & PSU Debt Fund

Introduced in 2014, this mutual fund scheme aims to deliver capital growth over the short term through investments in debt securities issued by PSUs, PFIs, and banks. The fund presently has assets under management worth INR 5380 crores. Its expense ratio is 0.39%, similar to most other schemes in the category. The scheme can deliver consistent returns while managing risks and is ideal for those interested in stable returns with a short investment zone.

Minimum Investment:

  • INR 5000 for lumpsum
  • INR 300 for SIP

Fund Performance: Since inception, the fund has delivered average annualized returns of 8.12%. Its returns for the last year are 2.95%.

Nippon India Banking & PSU Debt Fund

This debt fund has an AUM of INR 4242 crores. It aims to deliver consistent returns with a lower market risk over a short duration. The expense ratio is at 0.33%, similar to others in the category. The fund’s top holdings are in Indian Oil Corporation, GOI, Indian Railway Finance Corporation, etc.

Minimum Investment:

  • INR 5000 for lumpsum
  • INR 100 for SIP

Fund Performance: Since inception, the fund has delivered average annualized returns of 7.85%. Its returns for the last year are 2.85%.

Aditya Birla Sun Life Banking & PSU Debt Fund

This mutual fund scheme from Aditya Birla Sun Life Mutual Fund has been around for nine years. It currently manages assets worth INR 9611 crores and is a medium-sized fund in the category. Its expense ratio is close to most other funds of the type at 0.35%. The fund has a high credit profile and delivers consistent returns over the short term. The top holdings of the scheme are in Axis Bank, GOI, State Bank of India, etc.

Minimum Investment:

  • INR 1000 for lumpsum
  • INR 1000 for SIP

Fund Performance: Since inception, the fund has delivered average annualized returns of 8.68%. Its returns for the last year are 3.18%.

PGIM India Banking & PSU Debt Fund

Another well-performing banking and PSU fund from PGIM India Mutual Fund is this debt scheme introduced about ten years ago. Currently, the fund manages assets worth INR 67 crores and aims to generate capital growth over the short term. The expense ratio of this scheme is in-line with others in the category at 0.21%.

Minimum Investment:

  • INR 5000 for lumpsum
  • INR 1000 for SIP

Fund Performance: Since inception, the fund has delivered average annualized returns of 8.07%. Its returns for the last year are 2.74%.

DSP Banking & PSU Debt Fund

Launched back in 2013, this debt scheme from DSP Mutual Fund aims to generate optimum returns with the lowest credit risk by investing in debt instruments issued by PFIs, PSUs, and banks. Currently, the fund manages INR 2562 crores worth of assets. The expense ratio of the scheme is 0.32%, much like other funds in the category. The fund’s top holdings are in Hindustan Petroleum, Axis Bank, HDFC Bank, GOI, etc.

Minimum Investment:

  • INR 1000 for lumpsum
  • INR 500 for SIP

Fund Performance: Since inception, the fund has delivered average annualized returns of 8.1%. Its returns for the last year are 2.46%. The scheme doubles the invested money every nine years.

Kotak Banking and PSU Debt Fund

This scheme from Kotak Mahindra Mutual Fund is a banking & PSU fund started nine years ago. As of June 2022, the fund manages assets worth INR 6968 crores. It is a medium-sized fund in the category, and the expense ratio is similar to others at 0.36%. The fund predominantly invests in the Bank of India, RBI, HDFC Bank, etc.

Minimum Investment:

  • INR 5000 for lumpsum
  • INR 1000 for SIP

Fund Performance: Since inception, the fund has delivered average annualized returns of 8.3%. Its returns for the last year are 3.17%. The scheme doubles the invested money every nine years.

Frequently Asked Questions

Investing in Banking & PSU funds is simple and can be done online or offline. You can either visit the AMC physically or consult a broker to invest through offline mode. Alternatively, you can visit an online investment platform like 5Paisa.com and choose from many mutual funds available in one place. You can compare the funds you are interested in and use the lumpsum or SIP calculator to estimate your returns.

These funds are ideal for ultra-short to short-term investment with a maximum duration of three years. The ideal holding period for these schemes is between one to three years, so they are suitable for investors with short-term investment goals.

These are debt mutual fund schemes where almost 80% of the assets are invested in debentures, bonds, and certificates of deposits. The money is mainly invested in securities with low maturity periods and high liquidity.

It considers investing in public sector banks operating under the central government. It makes them much safer than private sector undertakings. These mutual funds are known to deliver high returns, but the returns depend a lot on market volatility.

As these funds invest in debt securities for a short duration, market volatility does not influence their returns, making them an ideal low-risk investment option. Though these funds are not entirely risk-free, they carry lesser risk than other debt funds.

The fund house specifies the scheme’s minimum investment amount for Banking & PSU funds. Generally, it can be anywhere from INR 1000, while the minimum SIP amount can start as low as INR 100.

According to the regulations of the SEBI, Banking & PSU funds must invest a minimum of 80% of assets in debt securities issued by public sector undertakings and banks.

There is no holding period for these mutual funds; investors are free to exit their positions anytime.

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