Banking and PSU funds are a type of fixed income fund. These schemes come under the debt mutual fund category. These schemes invest in debt and money markets. They are issued by banks, public sector undertakings and public financial institutions. Their paper quality is better.
Fixed Income Funds : If you want to avoid equity exposure but are looking for a safe option for better returns than small savings schemes like fixed deposits, then Banking and PSU Mutual Funds can be an option. If you look at the long term return chart of Banking and PSU Mutual Funds, there are many schemes which are giving returns similar to FDs or slightly better.
The most important thing is that their paper quality is better and they have got high rating. That is why they are a safe option for investment. When the market is good, they give better returns than FDs. A rate cut is expected in the coming days and their performance may improve further when the rates are reduced.
About Banking & PSU Funds
Banking & PSU funds are a type of fixed income fund. These schemes fall under the debt mutual fund category. These schemes invest in debt and money markets. They are issued by banks, public sector undertakings (PSUs) and public financial institutions (PFIs). As per the rules of market regulator SEBI, banking and PSU funds have to invest at least 80% of their total assets in such institutions. The credit quality of bank and PSU funds issued under debt and money markets is better than other options. Such listed companies are usually large-cap and have high ratings from top credit rating agencies.
- Returns of these schemes in 10 years (annualized)
- ABSL Banking & PSU Fund: 8.12%
- ICICI Prudential Banking & PSU Fund: 8.04%
- Edelweiss Banking & PSU Fund: 8%
- HDFC Banking & PSU Fund: 8%
- Kotak Banking & PSU Fund: 7.90%
Benefits of banking and PSU funds
- There are chances of rate cuts in the coming days and these funds perform well when interest rates are falling.
- It is not that these schemes spoil the returns in rate hike, rather the negative risks are limited.
- Due to good credit quality, these schemes give stable and attractive returns on maturity.
- These schemes are low risk investments. SEBI’s rule is that all the options in which these schemes invest your money are of good quality and high rating.
- During the rate cut period, these funds have the potential to give higher returns than traditional small savings.
- Due to short term maturity, the fund is not locked for a long time.
Is there any hidden risk
There is some risk in banking and PSU funds. There is an inverse relationship between banking and PSU funds and interest rates. Fluctuations in interest rates affect the performance of these funds, even if it is minimal. When interest rates increase, the value of banking and PSU funds decreases, while it increases when rates decrease. However, if we talk about the present time, rate hike is at its peak and rates are expected to decrease further. Due to this, the performance of these funds is also improving and is expected to improve further.
Who should invest
If the investment target is from one year to three years, then banking and PSU funds can be a better option. However, you can also invest in them for long term through lump sum or SIP. Banking and PSU funds are safer than other debt funds. If you do not want to take market risk, that is, you are in the conservative category, then you can consider these options. Banking and PSU funds can give you higher returns than FD.
