Banking and PSU debt funds: Are they a suitable option for conservative investors?

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When it comes to mutual fund investments, investors may have different financial goals and objectives. While some prefer the high-risk/high-reward nature of equity funds, others may seek the relative stability of debt funds. Among the many options available in the debt fund category, banking and PSU funds have been steadily gaining traction.

However, a common question asked by many investors pertains to banking and PSU fund investment risk. So, are banking and PSU funds suitable for conservative investors? Let’s take a closer look at these funds and find out.

  • Table of contents
  1. What are banking and PSU funds?
  2. Are banking and PSU funds suitable for conservative investors?
  3. How to balance risk in banking and PSU funds?
  4. Advantages of banking and PSU funds
  5. FAQ

What are banking and PSU funds?

Banking and PSU funds are a category of debt funds. These funds primarily invest in high-grade debt instruments issued by banks and public sector undertakings. In fact, SEBI guidelines mandate that at least 80% of a banking and PSU fund's assets should be invested in such instruments. The relatively high credit quality of the underlying securities in banking and PSU funds ensures a healthy balance between liquidity, relative stability, and potential yield.

Are banking and PSU funds suitable for conservative investors?

If you're considering an investment horizon of 2-3 years, banking and PSU funds could be a reasonable choice. Their moderate risk profile compared to most other funds makes them relatively stable for investments. Moreover, aside from conservative investors, even investors with a moderate to aggressive risk profile can benefit from the relative stability offered by these funds.

Banking and PSU funds are especially suitable to investors with the following characteristics:

Moderate risk investment: Given their limited exposure to debt market volatility, these funds can be a good choice for risk averse investors.

Return potential: It tends to outperform traditional options like fixed deposits, although at a relatively higher risk, these funds present an alternative for bank investments

Liquidity and credit quality: Banking and PSU funds invest predominantly in AAA-rated debt instruments. This not only ensures superior credit quality but also liquidity, making them a relatively stable depending on one's financial goals.

How to balance risk in banking and PSU funds?

While these funds are typically associated with potentially reasonable and relatively stable returns in the short term, factors like interest rate fluctuations and market volatility must always be factored in for duration risk.

However, a conservative investor is likely to ask – “how to avoid risk in banking and PSU funds?” Well, no investment is completely devoid of risk. And in case of banking and PSU funds, interest rates play an important role to determine the overall risk exposure.

A surge in rates could negatively impact the NAVs of banking and PSU funds, thus affecting investors’ returns.

Advantages of banking and PSU funds?

Liquidity: One of the main advantages of these funds is their liquidity. This essentially means that investors can readily convert their investments into cash without a significant waiting time or penalty. In scenarios where unexpected expenses arise, having an investment you can quickly liquidate without major losses can be invaluable.

Moderate risk: The shorter investment duration of these funds implies they are relatively less exposed to the extended market volatility that longer-term funds might face. By predominantly investing in banks and public sector undertakings, these funds naturally align with institutions that have a track record of relative stability. The public-sector nature of many of these entities offers an additional layer of comfort. Moreover, their preference for high-quality debt instruments, especially those rated AAA, further minimises the associated credit risk.

Potential returns: While no investment guarantees returns, banking and PSU funds have historically shown the potential to outperform traditional savings avenues, especially in a falling interest rate scenario, although at a relatively higher risk. Therefore, for investors looking for something more than the returns from savings accounts or fixed deposits, these funds present a good alternative, although with relatively more risk. In addition to interest earnings, these funds also offer the potential for capital appreciation. In scenarios where interest rates decline, the underlying securities' value can increase, thus offering additional returns to investors.


The blend of relative stability and the potential for returns makes banking and PSU funds a good option. These investment instruments offer a blend of features that cater to the needs of investors seeking both relative stability and potential returns. While they are not completely devoid of risks, their design and structure make them an investment choice for those seeking a middle ground between the traditional stability of fixed deposits and the return potential of more aggressive investment options. As always, it is advisable to consult a financial expert to decide if banking and PSU funds are suited to your investment portfolio.


What are Banking and PSU debt funds?
These are debt mutual funds that primarily invest predominantly in debt instruments issued by banks and public sector undertakings. They are considered moderate risk due to the creditworthiness of these institutions.

Are Banking and PSU debt funds stable for conservative investors?
Yes, these funds are generally considered stable for conservative investors because they invest in high-quality debt securities issued by government-owned entities and well-established banks, which have lower default risk.

What kind of returns can conservative investors expect from these funds?
Banking and PSU debt funds typically offer moderate, relatively stable returns, making them suitable for conservative investors who prioritize low impact of volatility and relatively stable returns.

Do these funds have any interest rate risk?
Yes, like all debt funds, Banking and PSU debt funds are exposed to interest rate risk. When interest rates rise, the value of existing bonds in the fund may fall. However, this risk is generally lower compared to funds with longer-duration bonds.

How can conservative investors choose a suitable Banking and PSU debt fund?
To select a suitable fund, investors should consider factors like the fund's credit quality, expense ratio, and historical performance. It's also essential to align the fund's duration with your investment horizon and risk tolerance. Investors can consult a financial advisor.

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.