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Your guide to Banking & PSU Debt fund

  • Akshatha Sajumon
  • Jan 12 2022
  • 8 minutes
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According to the Securities and Exchange Board of India (SEBI) classification, open-ended funds that invest 80% or more of their corpus in debentures, bonds, banking, and public sector undertakings (PSUs) are termed as Banking & PSU Debt Fund. In 2017, SEBI, the statutory body that regulates India’s mutual fund market, announced that municipal bodies’ debt securities offerings can also be clubbed under the portfolio of a banking and PSU fund. In general, banking and PSU debt funds carry relatively less risk and have good credit ratings. Let’s explore these in more detail.

Features of Banking and PSU Debt Fund

Banking and PSU debt funds are some of the most sought-after mutual funds, especially by investors who have a low-risk appetite. While selecting investments of these open-ended debt funds, fund managers mostly include Maharatna and Navratna companies since the risk factor is substantially low. 

Some of the key features of banking and public sector undertaking fund are: 

  • 80% of the banking and PSU debt funds are debentures, government bonds, certificates of deposit, and others. 
  • Asset Management Companies (AMCs) that offer these mutual fund schemes have at least “AAA-” credit ratings. 
  • These open-ended funds have low risk associated with them as the fund portfolio is procured from debt securities. 

What are the main benefits of banking and PSU debt funds?

Investors can look forward to availing below-mentioned benefits by investing in Banking and PSU Debt Funds:

Liquidity

Since the investment focus of these funds is in top-rated instruments (such as bonds of NABARD, SIDBI, etc.), they are highly liquid funds. Investors can gain stable returns as PSU bonds are frequently traded and fund managers can make the most of capital appreciation opportunities during price drops. This can benefit investors who are looking for returns within a short time period of 1-2 years.

Low Risks

Banking and PSU Funds have a relatively low risk of market volatility since they invest in quality funds that have a high credit rating and focus on short/medium-term investments. While it may not be entirely risk-free but comes with lower risk when compared to debt funds like Dynamic Bond Funds or Credit Risk Funds.

Better Returns

Banking & PSU funds can be easily replaced by Fixed Deposits in any investment portfolio, especially if one is looking to earn slightly higher returns within a short tenure and with limited risks. These can be safe havens during a debt crisis since they can offer better price discovery to investors. 

What are the risks and limitations with Banking and PSU Debt Funds?

The risks in banking and PSU debt funds are comparatively low, as the corpus comprises PSUs and banks’ debt instruments. These institutions are backed by the central government, and the fund schemes are substantially secured compared to equity funds. 

However, just like any investment, there is always a tradeoff between the returns earned and the risk associated. Here are a few limitations of these funds that the investor should keep in mind prior to investing in these funds: 

  1. High Net Asset Value (NAV): Due to the low-risk factor of PSU debt funds, they see a huge demand in the market. Investors often pick these securities to balance out the total risk of their portfolio. This results in a higher cost of investment in the funds which could result in a financial burden on the investor as well. 
  2. Low returns: In general, the returns on debt instruments are lower when compared to equity investments. The portfolio of a PSU and banking debt fund is primarily made up of large-cap companies, and there is very little chance of diversification in the composition of these funds. As a result, the prices remain stagnant and so do profits. 
  3. Short investment tenure: Banking and PSU funds are ideal investments for a short holding, i.e., 1 to 3 years. 

Who should invest in Banking and PSU Fund?

Banking and PSU debt funds are the best suited for risk-averse investors. Instruments included in these funds have government backing and are therefore less risky than any equity funds. 

  • Since these are debt funds, they are not easily affected by market volatility and are therefore suitable for investors who have a low-risk appetite.
  • Investors who are looking for an alternative to bank deposits like FDs can consider investing in these funds.
  • Investors who wish to invest in debentures carrying a high credit quality and offer greater liquidity.
  • Investors who have an investment horizon of 1-3 years can invest in these funds, since the average maturity period of these funds is 1-2 years.

These funds can be used by investors who invest heavily in equity funds and want to mitigate the risk factor of their portfolio. In adverse situations, like the one the market has seen during the pandemic, investment in banking and PSU debt instruments can act as a cushion. 

Top performing banking and PSU fund recommendations

Here are the details of the top fund recommendations for this fund category:

  1. IDFC Banking & PSU Debt Fund
  2. Axis Banking & PSU Debt Fund
  3. ICICI Prudential Banking and PSU Debt Fund
  4. Kotak Banking & PSU Debt

IDFC Banking & PSU Debt Fund

About Fund

The objective of the scheme is to achieve optimal returns through investment focus in money market and debt instruments that are primarily issued by scheduled commercial banks. It is ideal for investors who have a low risk appetite and prefer to invest in debt funds over bank deposits.

Inception DateMarch 07, 2013
Benchmark NameNIFTY Banking and PSU Debt Total Return Index
Fund ManagerSuyash Choudhary
Expense ratio0.31%
Fund typeOpen-ended
RiskLow

Historical Returns of the Fund (annualised)

1-Year2-Year3-Year5-Year10-Year
3.76%7.42%8.81%7.93%8.29%

Axis Banking & PSU Debt Fund

About Fund

The scheme aims to generate stable returns through investment primarily in debt and money market instruments that are issued by Public Financial Institutions, banks and Public Sector Units.

Inception DateJanuary 01, 2013
Benchmark NameNIFTY Banking and PSU Debt Total Return Index
Fund ManagerAditya Pagaria
Expense ratio0.33%
Fund typeOpen-ended
RiskLow

Historical Returns of the Fund (annualised)

1-Year2-Year3-Year5-Year10-Year
3.72%6.73%8.11%7.93%8.34%

ICICI Prudential Banking and PSU Debt Fund

About Fund

The scheme aims to generate income for investors primarily by investing in debt instruments belonging to banks and the public sector. It has a moderate risk level and returns.

Inception DateJanuary 01, 2013
Benchmark NameCRISIL Banking and PSU Debt Index
Fund ManagerChandni GuptaRahul Goswami
Expense ratio0.35%
Fund typeOpen-ended
RiskModerate

Historical Returns of the Fund (annualised)

1-Year2-Year3-Year5-Year10-Year
4.70%7.19%8.33%7.49%8.64%

Kotak Banking & PSU Debt

About Fund

The scheme aims to generate returns by primarily investing in debt & money market securities issued by banks, Public Sector Undertaking (PSUs), and Public Financial Institutions (PFI). It also invests in sovereign securities issued by the central and state governments.

Inception DateJanuary 01, 2013
Benchmark NameCRISIL Banking and PSU Debt Index
Fund ManagerDeepak Agrawal
Expense ratio0.37%
Fund typeOpen-ended
RiskModerate

Historical Returns of the Fund (annualised)

1-Year2-Year3-Year5-Year10-Year
4.39%7.58%8.79%8.08%8.73%

Edelweiss Banking and PSU Debt Fund

About Fund

The fund aims to fetch returns through constructing a portfolio comprising debt and money market instruments that are issued by banks, PSUs, Public Financial Institutions, and entities that are majorly owned by central and state governments.

Inception DateSeptember 13, 2013
Benchmark NameNifty Banking and PSU Debt Total Return Index
Fund ManagerRahul DedhiaGautum Kaul
Expense ratio0.33%
Fund typeOpen-ended
RiskModerate

Historical Returns of the Fund (annualised)

1-Year2-Year3-Year5-Year10-Year
4.90%8.98%10.39%8.72%8.98%

Conclusion

Banking and PSU debt funds can be a good option to diversify an investment portfolio and balance out the overall risk involved. Investors must carefully assess the available fund options before selecting one


Frequently Asked Questions

What is Banking and PSU Debt Fund?
Banking & PSU debt funds are open-ended funds that mainly invest in debt instruments of banks, Public Sector Undertakings (PSUs) and Public Financial Institutions as classified by SEBI.

Are Banking and PSU Debt Funds safe?
Banking & PSU funds generally have a low-risk factor as compared to other debt fund categories. These primarily invest in bonds of banks and public-sector companies, which makes the underlying portfolio’s credit quality high.

Which is the best Banking and PSU Debt Fund?
Some of the top-performing banking and PSU debt funds are as below:

  • IDFC Banking & PSU Debt Fund.
  • Axis Banking & PSU Debt Fund.
  • Aditya Birla Sun Life Banking & PSU Debt Fund.
  • DSP Banking & PSU Debt Fund.
  • LIC MF Banking & PSU Debt Fund.

Does a PSU fund have a lock-in period?
Banking and PSU debt funds are open-ended and highly liquid. These do not come with a lock-in period and are ideal investment options for investors who have a shorter investment horizon

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