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Understanding risks and rewards in banking and PSU funds

Risk and reward
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Banking and Public Sector Undertaking (PSU) Funds primarily invest in the debt instruments of the banking sector, public sector undertakings and public financial institutions, aiming to provide a blend of relative stability and reasonable returns.

Let’s discuss these schemes and understand their advantages, disadvantages, and suitability for different investor profiles.

  • Table of contents
  1. What are banking & PSU funds?
  2. Benefits of banking and PSU fund
  3. Risks of banking and PSU fund
  4. Who should invest in banking & PSU funds?
  5. FAQ

What are banking & PSU funds?

Banking and PSU Funds fall under the category of debt mutual funds and are specifically designed to invest in the debt instruments of the banking sector, public sector undertakings, and public financial institutions. These funds offer investors exposure to the relatively stable banking industry and government-backed public sector companies and public financial institutions, which are known for their established track records.

Benefits of banking and PSU fund

Relative stability

One of the primary advantages of Banking and PSU Funds is the relative stability they offer. These funds predominantly invest in the debt instruments of banks, public sector undertakings, and public financial institutions, which are relatively stable.

Moderate risk exposure

While no investment is entirely risk-free, Banking and PSU Funds are considered to have a moderate risk exposure compared to pure equity funds which have high risk. The focus on debt instruments and the backing of stable banking and government enterprises contribute to a more conservative risk profile.

Professional management

Like other mutual funds, even banking and PSU funds are actively managed by experienced fund managers who continuously monitor the market and adjust the portfolio composition accordingly.

Risks of banking and PSU fund

Interest rate sensitivity

Banking and PSU Funds can be sensitive to changes in interest rates. Fluctuations in interest rates can impact the fund's performance, especially in the case of long-duration debt instruments.

Credit risks

Despite investing in relatively stable entities, banking and PSU Funds are not entirely devoid of credit risks. The creditworthiness of the underlying entities can impact the fund's performance. Investors should assess the credit quality of the portfolio holdings and the associated risks before making investment decisions.

Inflation risk

Inflation can erode the purchasing power of returns generated by banking and PSU Funds. While these funds aim to provide relative stability and income, investors should consider the impact of inflation on the real returns of their investments over the long term.

Who should invest in banking and PSU funds?

Conservative investors

Investors with a conservative risk appetite who prioritize less impact of volatility over aggressive capital appreciation may find banking and PSU Funds appealing.

Retirees and income-seeking investors

Retirees and individuals seeking a regular inflow of funds can benefit from the Banking and PSU Funds. The relative stability offered by these funds makes them a good option for those in need of consistent cash flow.

Risk-averse investors

Investors who are risk-averse and prefer to minimize the impact of market volatility on their investment portfolio may find the moderate risk exposure of Banking and PSU Funds appealing.


Banking and PSU Funds provide an option that balances relative stability with moderate growth potential. While they come with advantages such as relative stability and regular inflow of funds, investors should also be mindful of the potential disadvantages associated with these funds, including moderate growth potential and interest rate sensitivity.

Investing in Banking and PSU Funds can be a prudent choice for conservative investors, retirees, risk-averse individuals, long-term savers, and those seeking diversification within the financial sector. However, it's crucial for investors to carefully assess their individual investment goals, risk tolerance, and financial circumstances before making investment decisions. Consulting a financial advisor can provide valuable guidance.

Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This document should not be treated as an 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 purposes 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.