What are Banking and PSU funds?

Banking and PSU Funds are debt mutual funds that primarily invest in debt instruments issued by banks, public sector undertakings (PSUs), and government entities. Seeking to balance risk and reasonable returns, these funds provide a relatively stable investment option compared to equity funds while aiming to outperform traditional fixed-income instruments.

• Table of contents

• Key features of a Banking and PSU Funds
• How does a Banking and PSU Fund Work?
• How should you Invest in a Banking and PSU Fund?
• Why should you invest in Banking and PSU fund?
• Taxation rules of Banking and PSU Funds

Key features of Banking and PSU Funds

• Underlying securities: These funds predominantly invest in debt securities issued by banks and PSUs. The investments may include bonds, debentures, and other fixed-income instruments, often carrying relatively lower credit risk.
• Relative stability: Banking and PSU Funds are considered relatively low-risk compared to other debt funds due to the nature of their underlying securities, which government entities or financially stable corporations typically back.
• Credit quality: Fund managers focus on maintaining a portfolio with high credit quality to mitigate the risk of default. This emphasis on credit quality contributes to the overall relative stability of these funds.

Considerations:

While Banking and PSU Funds offer relative stability, it's important for investors to note that they are not entirely risk-free. Factors such as interest rate movements and economic conditions can still impact the performance of these funds. Additionally, investors should review the portfolio composition, credit quality, and historical performance before making investment decisions. As with any investment, understanding the fund's strategy and aligning it with one's financial goals is crucial.

How does Banking and PSU fund work?

Banking and PSU (Public Sector Undertaking) debt funds invest primarily in debt instruments issued by banks and PSUs. These funds seek to generate relatively steady returns by focusing on securities that are typically considered to have lower credit risk than corporate bonds.

Fund managers select debt instruments based on credit ratings and maturity profiles. These funds usually include debt securities such as certificates of deposit (CDs), commercial papers (CPs), and bonds issued by banks and PSUs. Potential returns are earned through interest payments on these debt securities and principal repayment at maturity.

However, the market value of these mutual funds can rise and fall based on interest rate changes and other market movements. When interest rates increase, the value of existing debt securities may fall, and vice versa.

These funds can be suitable for investors looking for reasonable return potential with liquidity and relative stability.

Also Read: Banking and PSU debt funds: Advantages, taxation and investment suitability

How should you invest in a Banking and PSU Fund?

Investing in a Banking and PSU Fund requires a clear understanding of your investment objectives and risk tolerance. These funds can be suitable for investors with a moderate risk appetite seeking a relatively steady income stream. Before investing, evaluate your financial goals and investment duration. Consider the following factors:

• Risk evaluation: Understand the credit risk and interest rate risk associated with these funds.
• Investment duration: These funds can be suitable for medium-term investments.
• Fund manager’s track record: Review the fund manager’s investment approach.
• Expense ratio: Take into account the expense ratio, as it affects overall returns.
• Portfolio diversification: Ensure the fund aligns with your broader investment strategy.
• Tax considerations: As of 2023, indexation benefits for debt funds have been removed, and returns are now taxed based on your income tax slab.

Why should you invest in Banking and PSU fund?

A Banking and PSU fund can be beneficial for investors aiming for a relatively steady income stream with a moderate risk profile. These funds have the potential to generate returns through investments in debt instruments issued by banks and PSUs, which are often considered to carry lower credit risk than corporate bonds. Here are some potential advantages:

Relatively steady income: These funds aim to offer a relatively steady income stream.
Lower credit risk exposure: They invest mainly in debt instruments issued by banks and PSUs, which are typically considered to have lower credit risk.
Diversification benefits: They can contribute to a well-diversified debt portfolio.
Potential for returns: They offer reasonable return potential through interest income. Market value may also rise or fall depending upon prevailing interest rates.

While these funds can be suitable for certain investors, they are still subject to market fluctuations, including interest rate and credit risks. Conducting thorough research and assessing your risk tolerance is essential before investing.

Taxation rules of Banking and PSU funds

Returns from Banking and PSU funds are taxed based on the investor’s income tax slab rate, meaning the gains are added to total income and taxed accordingly. All gains are deemed to be short-term capital gains regardless of the holding period.

Also Read: A brief guide to Bajaj Finserv Banking and PSU Fund?

Conclusion

Banking and PSU funds provide a potential investment option for those seeking a relatively steady income stream through debt instruments issued by banks and public sector undertakings. These funds focus on entities generally considered to have lower credit risk than corporate bonds. However, they still carry risks, including interest rate fluctuations, credit risk, and market volatility.

Investors should assess their risk tolerance, financial goals, and investment horizon before choosing Banking and PSU funds.

While Banking and PSU funds can complement a diversified debt portfolio, they should be considered alongside other investment options within a well-structured financial plan. Seeking advice from a financial professional can help make informed and guided investment decisions.

FAQs:

What is the meaning of Banking and PSU funds?

Banking and PSU (Public Sector Undertaking) funds are debt mutual funds that primarily invest in bonds and debt instruments issued by banks and PSUs. These funds seek to generate relatively steady return potential through such investments.

What is the return potential of Banking and PSU mutual funds?

The long-term return potential of Banking and PSU mutual funds is not as high as that of equity funds. They provide relatively steady returns. However, they may be comparable to or better than returns on fixed deposits depending on market conditions. But unlike FDs, returns are subject to market risk and are not guaranteed with mutual funds.

How long should I hold Banking and PSU mutual funds?

These funds are most suitable for a medium holding period, typically ranging from 3 to 5 years. Holding them for a longer duration can help generate relatively steady returns while mitigating short-term fluctuations.

Where do banking and public sector mutual funds put their money?

These funds primarily invest in debt securities issued by banks and PSUs, including bonds, debentures, and other fixed-income instruments. Investments are generally made in entities with relatively strong credit ratings.

Are banking and public sector mutual funds risky?

While these funds carry lower risk compared to equity funds, they are not risk-free. Risks include credit risk (potential default) and interest rate risk. Although banks and PSUs are generally considered creditworthy, some level of risk persists.

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 an 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.