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:

There are various advantages of investing in PSU bonds. Some of them are mentioned below:

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. Investors can also invest in PSU bonds through debt mutual funds, such as Banking and PSU funds. Those considering a Systematic Investment Plan in such a scheme can consider taking the help of a monthly SIP calculator to plan their investment approach. The calculator estimates the potential future value of your monthly contributions based on your SIP amount, tenure and expected returns.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.