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    Banking and PSU Funds

    Apr 25, 2024
    5 min | Views 354

    Investors always seek diverse and reliable options to invest in mutual fund schemes. Among the myriad mutual fund categories available, banking and public sector undertaking (PSU) funds may be posited as relevant options for the investment. Investors often favor banking and PSU funds for their probable stability against market volatility.

    Sectoral Funds based on Banking and PSU are touted as relatively safer, mainly due to their backing by government agencies. However, their returns depend on market conditions. Investors with an income-generation goal can consider investing in these high-liquidity funds.

    Banking and PSU Fund Features

    • Banking and PSU Funds invest at least 80% in debt-related securities of banks and public sector undertakings, such as debentures, bonds, etc., and are government-backed.

    • The listed companies are usually established, large-cap companies with a minimum AAA or equivalent credit.

    Understanding Banking and PSU Funds

    The banking and public sector industries have been pivotal contributors to India’s economic growth. These sectors have experienced many ups and downs in the economy yet have shown resilience while navigating through fluctuating market cycles. This perceived notion of stability with these funds might offer a sense of security to interested buyers who want to indulge in low-risk mutual fund schemes.

    Banking funds primarily invest in the stocks of banking companies. Public sector undertaking funds focus on investing in the stocks of public sector companies across various industries like energy, manufacturing, etc. The significant appeal of these funds is that they are government-backed, which makes them a relatively safer option.

    These funds can offer a good combination of diversification and stability to your portfolio during market fluctuations. Their risk-averse characteristics and potential for consistent dividends can position these funds as a dependable choice for investors.

    Banking and Public Sector Undertaking Funds: An Overview

    Type 

    Open-ended debt fund 

    Proposed investment tenure 

    Short-term or medium to short-term [1-3 years] 

    Investment assets 

    Minimum 80% in debt securities of banks and public sector undertakings or public financial institutions like debentures, bonds, certificates of deposit, etc. of large-cap companies with minimum AAA credit 

    Investor types 

    Short-term investors 
    Risk-averse investors 

    Returns 

    Lower than equities 

    Risk level 

    Less risky 

    Taxation 

    Long-term capital gain (LTCG): gains held for >3 years 
    Short-term capital gain (STCG): gains held for <3 years 
    Both capital gains will be taxed according to the investor’s income tax slab rate. [From April 1st, 2023] 

    Limitations of Banking and PSU Funds

    Investing in banking and PSU funds might seem like a dream come true due to their low-risk nature; however, like any other mutual fund, these funds do have some limitations.

    High NAV: Banking and PSU funds invest in large-cap government-backed companies. As a result, these funds have gained popularity among low-risk investors. This popular demand can substantially increase the NAV prices, resulting in higher investment value for investors.

    Lower returns: The funds may give lower returns than equity investments. These funds may provide steady returns over the time period, but they offer limited growth opportunities for capital appreciation. Also, to achieve substantial capital appreciation, a long-term investment is preferred, whereas banking and PSU funds work better for short-term periods.

    Short-term investment tenure: Banking and PSU funds have a short tenure (1-3 years), which is suitable for short-term investors. Hence, reaching long-term investment goals with these funds might be difficult.

    Interest rate risks: These funds share an inversely proportional relationship with interest rates. The price of the fund decreases as the interest rate increases, and vice versa. Hence, this debt fund category is not entirely risk-free.

    Conclusion

    Banking and PSU funds present a specialized investment avenue for investors who have a focused approach to the banking and public sectors. Both funds can provide diversification across government-backed industries, seeking a broader spectrum of investments within the public and private sectors.

    Note: The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers.

    Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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