Banking and PSU (or public sector undertaking) debt funds primarily invest at least 80% of their corpus in obtaining debt instruments issued by banking institutions and other public sector companies. As per an amendment announced by SEBI in December 2017, debt securities issued by municipal bodies can also be included in the portfolio of such banking and PSU funds. Such listed companies are usually large-cap and have AAA- ratings from the top credit rating agencies in the country.
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The Banking and Public Sector Undertaking funds are short-term debt funds. These funds provide good returns while minimizing risk by investing in high-quality debt instruments mostly issued by banks and government agencies.
Banking and PSU funds need to invest at least 80% of their assets in debt instruments issued by such institutions, according to SEBI criteria for mutual funds. As a result, these funds have higher credit quality than other debt funds. These funds strike the optimal balance of liquidity, safety, and yield.
A banking and PSU debt fund is one of the most popular types of mutual funds, as it has nominal risk associated with the total investment. Fund managers mainly target the Maharatna and Navratna companies to build the portfolio, as they have a history of yielding substantial gains.
The characteristics of a banking and PSU fund can be described as follows
This mutual fund plan primarily invests in public sector banks overseen by the government. As a result, these funds are far more secure than other private-sector ventures. These are short-term, medium-term, or ultra-short-term investments with lower risk than conventional debt funds, although they are not risk-free.
Although this mutual fund scheme provides a high return, it is subject to market volatility. As a result, investors with a low-risk tolerance may choose these funds, but they should consider their financial goals and market conditions before investing.
You can invest in banking and PSU debt mutual funds through AMC or online platforms such as Groww.
To invest via the Groww app, simply follow these steps-
Step 1: Visit the App Store or Play Store and download the Groww application.
Step 2: Register on the application, complete KYC, and look for suitable Banking and PSU funds, and start investing almost instantly.
Centralised scheduled banks and public sector undertakings are backed by the government, and hence, have nominal risk associated. Also, this type of mutual funds primarily focuses on debt instruments issued by such companies. Debt securities generally have a lower risk factor than equities as they act as a liability on the issuing organisation. Companies have to pay interest to debenture holders before distributing profits among equity shareholders.
Risk-averse investors looking for a secure investment option can opt for a banking and PSU debt fund. Individuals opting for the dividend pay-out option can realise gains through timely yields, while growth option allows investors to enjoy capital gains through increased NAV value on resale.
Investors who are habituated with the workings of the stock market and often pool their money in risky assets can choose to allocate a part of the portfolio to the best banking and PSU debt fund, as it mitigates the risk factor considerably. In times of unforeseen downtrend of the stock market, money deposited in such debt mutual funds can provide considerable returns to compensate for lower returns from the risky assets.
Thus, the primary objective behind investment in a banking and PSU debt fund is the preservation of corpus. However, the rate of return on investment (ROI) may be lower than ROI realised through equity tools.
Nonetheless, such debt mutual funds are ideal for investors looking to park surplus funds with a relatively secure investment scheme, so that the entire portfolio amount is preserved, along with corresponding returns.
Taxation Rules of Banking and PSU Funds
Banking and PSU debt funds are taxed according to debt fund taxation regulations. Capital gains from these funds are taxed depending on the length of time the investor keeps fund units.
If an investor redeems the units before three years, the gains on redemption/sale are classified as short-term capital gains and will be taxed at the investor's marginal tax rate.
If the investor redeems the units after three years, the capital gains are deemed long-term gains and are taxed at 20% plus indexation. To compute capital gains, the purchase prices are increased in accordance with inflation. It is important to note that indexation affects the value of total long-term capital gains in order to demonstrate the effect of inflation on your investment.
Q1. What is the meaning of Banking and PSU funds?
Banking & PSU debt funds are debt funds that are solely lent to banks and government agencies. Due to the high quality of borrowers who qualify for these loans, the risk of default is relatively low. They are, however, affected when interest rates in the economy rise.
Q2. What is the return potential of Banking and PSU mutual funds?
These funds provide significantly greater and more steady returns to investors in the near term and with minimal risks.
Q3. How long should I hold banking and PSU mutual funds?
Banking and PSU Debt Funds lend to banks and PSUs over a medium period of time, you should hold these funds for at least 2-3 years.
Q4. Where do Banking and Public Sector Mutual Funds put their money?
Banking and PSU debt mutual funds are exclusively lent to banks and government agencies. The lending period is typically between two and three years. There are, however, funds that lend for extended periods of time.
Q5. Are banking and public sector mutual funds risky?
The borrowers to whom these funds lend are of exceptional quality. As a result, there is less possibility of the borrowers defaulting. However, because they lend for 2-3 years, they are affected by economic interest rate changes.
Disclaimer - Mutual Fund investments are subject to market risks; read all scheme-related documents carefully.
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