Investing in banking and PSU funds for retirement planning: A smart approach

When it comes to securing your financial future in retirement, a smart and often overlooked approach is investing in Banking and PSU funds. Classified by the Securities and Exchange Board of India (SEBI) as open-ended funds, these instruments invest a significant portion of their corpus in debentures, bonds issued by banking, public financial institutions (PFI) and public sector undertakings (PSUs).

SEBI mandates Banking and PSU funds to have an allocation of at least 80% to relatively stable instruments like debentures, government bonds, certificates of deposit, and others issued by banks, PSU, PFI etc.

• Table of contents

1. Benefits of investing in Banking and PSU funds for retirement
2. Risks and limitations with banking and PSU funds
3. Who should invest in banking and PSU fund?
4. Taxation of Banking and PSU funds
5. FAQ

Benefits of investing in Banking and PSU funds for retirement

For those planning their retirement, there are several smart benefits to consider when investing in Banking and PSU Funds:

Liquidity: With a focus on top-rated instruments, these funds provide high liquidity, allowing retirees to capitalise on relatively stable returns within a short time frame of 1-2 years.

Moderate risks: A smart retirement planning strategy involves managing risks. Banking and PSU Funds, with their focus on quality funds and short/medium-term investments, offer moderate risk.

Returns: Banking and PSU funds usually offer slightly better return potential within a with limited risks compared to fixed deposits. This makes them a suitable choice for retirement portfolios.

Risks and limitations with banking and PSU funds

While the risks associated with Banking and PSU Funds are comparatively low, it's essential for retirees to be aware of certain limitations:

Low returns: Returns on debt instruments, in general, are lower compared to equity investments.

Who should invest in banking and PSU fund?

For a smart retirement planning strategy, Banking and PSU funds are well-suited for:

• Retirees seeking instruments from banking, PSU, PFI etc with lower risk than equity funds.
• Individuals looking for alternatives to traditional bank deposits like Fixed Deposits.
• Retirees desiring debentures with high credit quality.
• Those with an investment horizon of 1-3 years, aligning with the average maturity period of these funds.
• Equity-heavy retirees aim to mitigate portfolio risk, especially during adverse market conditions like the pandemic, making these funds a smart cushion for retirement portfolios.
• The Finance Bill 2023 amendment classifies capital gains from debt mutual funds, including Banking and PSU funds, as short-term capital gains. This means that gains will be added to taxable income and taxed at the individual's income tax slab rate. Thus, a short-term capital gains tax is applicable based on the investor’s tax bracket.

Taxation of Banking and PSU funds

The Finance Bill 2023 amendment classifies capital gains from debt mutual funds, including Banking and PSU funds, as short-term capital gains. This means that gains will be added to taxable income and taxed at the individual's income tax slab rate. Thus, a short-term capital gains tax is applicable based on the investor’s tax bracket.

Conclusion

In the world of smart retirement planning, the role of Banking and PSU Funds should not be underestimated. Their relative stability, coupled with the potential for returns, makes them a prudent choice for retirees seeking to secure their financial future. As with any smart investment decision, it's crucial to consult with financial advisors or distributors to align these funds with personalised retirement goals.

FAQs:

Are Banking and PSU funds suitable for long-term investments?
Banking and PSU funds can be suitable for long-term investments as well, especially for risk-averse investors.

Are Banking and PSU funds entirely risk-free?
While Banking and PSU funds are among relatively stable options, they are not immune to market fluctuations. There may still be interest rate risk, liquidity risk, credit risk, and market risk associated with these schemes.

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.