Banking & PSU Funds are an open-ended Debt Funds predominantly investing in Debt instruments of banks, Public Sector Undertakings (PSUs) and Public Financial Institutions as classified by SEBI. It is a good choice for risk-averse investors as they mostly invest in AAA-rated or equivalent category that boast of high credit ratings and enjoy quasi-sovereign status as borrowers. Government ownership assures repayment. They have low-risk profile of an ultra short-term debt fund and the return potential of an income fund. It is ideal for seasoned investors looking for steady credit profile with less volatility.
Earlier known as short-term funds or income funds, SEBI introduced this new category a couple of years ago.
Funds that qualify to be Banking & PSU Funds
- Banking and PSU Funds allocate 80% of total assets in bank certificates of deposits or bonds/debentures of public sector companies
- They invest mostly in the AAA-rated category and hence the entire portfolio for most funds is of high credit quality
- They also have low average maturity time as they are generally the short term to medium term debentures of companies. The average maturity is about 1-2 years
- These funds have high liquidity as they hold PSU bonds that are highly liquid such as that of NABARD, SIDBI, etc.
- Banking & PSU Funds are a good alternative to Fixed Deposits if one wants slightly higher returns than FDs in short tenure and can take little risks
- It can generate stable Mutual Fund returns as PSU bonds are well traded and fund managers can gain from capital appreciation opportunities when rates fall
- Carries low risk and volatility as it invests in high credit quality funds and for short/mid duration
- High Liquidity of PSU bonds is an additional benefit for the investors who seek returns in the time-frame of 1-2 years
Although, Banking and PSU Bond are considered to be less risky, they do face risks from the interest rate movement. They might perform poorly in case of hardening or flat interest rates. They may show negative returns when yields go up as all bonds/debentures are traded and mark-to-market losses are inevitable. However, they have not shown negative returns over the time frame of 3 months or longer. As these funds are quite newly included, not much track record is available to look at for the performance. The annual returns have been around 8.6-8.9 and it is way higher than traditional debt options.
List of Banking and PSU Funds in India
|Fund Name||Net assets (Rs Cr)||1-Year||3-Year||5-Year|
|Aditya Birla Sun Life Banking & PSU||6458.93||11.43%||7.98%||9.40%|
|Axis Banking & PSU||6450.73||12.58%||8.67%||8.70%|
|IDFC Banking & PSU||6125.9||13.58%||8.14%||8.35%|
|ICICI Prudential Banking & PSU||5611.6||10.24%||7.80%||9.02%|
|Reliance Banking & PSU||3934.42||12.12%||8.11%||–|
|HDFC Banking and PSU||3122.89||11.57%||8.04%||8.92%|
|DSP Banking & PSU||1763.08||11.17%||7.78%||8.80%|
|SBI Banking and PSU Fund||1745.84||10.87%||8.38%||8.75%|
|Kotak Banking and PSU||1617.17||11.94%||8.34%||8.76%|
|Sundaram Banking & PSU||1013.26||11.32%||7.44%||7.86%|
|Franklin Banking & PSU Fund||162.74||12.94%||8.42%||8.94%|
|Edelweiss Banking & PSU Fund||60.99||13.20%||8.32%||8.70%|