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Public Sector Undertakings (PSU) Bonds

What are PSU bonds?

PSU bonds are debt securities issued by public sector undertakings (PSUs) in which the central or state governments own a greater than 51% stake. These bonds are an important source of financing for PSUs and offer investors a relatively stable investment avenue backed by the government. Additionally, the PSU bond definition states that they are issued with maturity periods ranging between 5-10 years, making them suitable for investors with a medium to long-term horizon.

Types of PSU bonds

There are several forms of PSU bonds, including:

  • Fixed-rate bonds
  • Floating-rate bonds
  • Inflation-indexed bonds
  • Zero-coupon bonds

How do PSU bonds work?

Investing in PSU bonds is like lending money to government-backed firms. These firms (PSUs) use your money for projects and business development and repay the investors with an interest.

Potential advantages of investing in PSU bonds:

Return potential: PSU bonds offer fixed and regular interest payments making them suitable for investors seeking a relatively steady income.

Relatively low risk of default: Government backing of PSUs ensures that the risk of default on interest payments and principal repayment is minimal.

Diversification: Investing in fixed-income securities like PSU bonds can enhance portfolio diversification and mitigate the overall risk.

Tax efficiency: Certain PSU bonds are tax-free wherein the interest generated is exempted from taxation.

Who should invest in PSU bonds?

Investing in PSU bonds can be suitable for:

Risk-averse investors: Investors seeking relative stability of the principal and potentially regular interest payments may consider PSU bond funds.

Diversification: Allocating a part of your portfolio to fixed-income instruments can offer overall risk mitigation.

Income seekers: Investors planning for retirement or those seeking a potentially steady income can consider PSU bond funds.

Extended horizon: Since PSU bonds are issued with maturities between 5-10 years, they can be suitable for investors with a medium-to-long term horizon.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.