Public Sector Undertakings (PSU) Bonds

Public sector undertakings (PSU) bonds are often considered suitable for investors seeking exposure to instruments that offer the potential for relatively steady, though still market-linked, interest income. PSU bonds follow a defined structure. They specify the maturity period, coupon rate and repayment schedule at the time of issue. Investors receive interest at pre-determined intervals, and the principal is repaid at maturity, subject to the issuer meeting its obligations. In this article, we look in detail about these bonds.

Table of contents

• What are PSU bonds?
• Types of PSU bonds
• How do PSU bonds work?
• Benefits of Investing in PSU Bonds
• Who should invest in PSU bonds?
• How to invest in 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.

Read Also: Corporate Bonds - How Are They Bought And Sold

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.

Benefits of investing in PSU bonds

PSU bonds may provide diversification to a portfolio that also includes equity, hybrid, and debt mutual funds. For investors who prefer predictable cash flows, PSU bonds may be helpful as part of an overall fixed–income allocation. However, returns are not guaranteed, and price movements may occur if interest rates change.

Key benefits include the following:

• They may offer relatively steady interest payouts, subject to market conditions and the specific bond structure.
• PSU issuers generally have relatively stable financial profiles, supported by government ownership.
• These instruments usually have clear disclosure requirements and follow established regulatory guidelines.

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.

How to invest in PSU bonds

Investors may access PSU bonds through the following routes:

• You can subscribe during a public issue when the PSU offers bonds to retail investors. These issues are listed on recognised stock exchanges after allotment.
• You can buy already-listed PSU bonds through the secondary market using a Demat and trading account.

Conclusion

Investing in PSU bonds may provide a potentially stable, fixed-income option for those seeking predictable returns. Considering factors such as interest rates, tenure, liquidity, and tax implications may help investors decide whether PSU bonds align with their financial objectives. Before investing, investors should review factors such as credit ratings, tenure, coupon rates, and taxation to understand the potential risks and returns. Listed PSU bonds also provide tradability on exchanges, offering flexibility for those who may wish to exit before maturity. Careful evaluation may support better planning and more informed investment decisions.

FAQs:

What is the full form/meaning of PSU bonds?

The term PSU bonds is short for Public Sector Undertaking bonds. These are debt instruments issued by Public Sector Undertakings to raise funds for operations or projects. These entities are owned partly or fully by the government. Investors receive periodic interest and principal at maturity, subject to the issuer’s creditworthiness and prevailing market conditions.

How to invest in PSU bonds?

Investors may buy PSU bonds through stock exchanges, RBI’s retail platforms where applicable, or via registered brokers and distributors. Some issues are offered through public issuance, while others trade in the secondary market.

Are PSU bonds less risky than government bonds?

Government bonds carry sovereign backing, while PSU bonds depend on the issuing company’s credit strength. Although many PSUs have government ownership, their bonds involve issuer-specific risk. Comparing credit ratings, financials, and maturity terms may help investors assess risk levels rather than assuming one category is inherently less risky.

Are PSU bonds safe for investment?

No, they are relatively stable, but not entirely safe. PSU bonds carry market-linked and issuer-related risks. Their repayment capacity depends on the financial strength of the specific Public Sector Undertaking. Investors may review credit ratings, issuer fundamentals, tenure, and personal risk tolerance before considering them, as no bond category offers assured outcomes.

Can PSU bonds be redeemed prematurely?

Premature exit depends on the bond structure. Listed PSU bonds may be sold in the secondary market, subject to liquidity. Some issues allow early redemption only under specific terms. Reviewing the offer document and liquidity conditions helps investors understand available exit options before purchasing.

Who should invest in PSU bonds?

PSU bonds may suit investors seeking predictable interest income and willing to accept issuer-related and interest rate risks. They may be considered by those with moderate risk tolerance and clarity on investment horizon.

How do PSU bonds work?

PSU bonds function as loans from investors to a Public Sector Undertaking. The issuer agrees to pays periodic interest and returns principal at maturity. Prices may fluctuate in the secondary market due to interest rate movements and credit conditions.