21st May 2024

What are Banking and PSU funds? Should investors consider investing in them?

When the bond prices go down, there is a sharp inverse effect on the interest rates. During such times, most investors turn to funds with high credit risk. However, credit risk funds are highly volatile in nature (being debt funds), as they creditor may or may not be able to pay promised interest over the determined time frame. Also, the main objective of maintaining a debt fund portfolio is to earn stable returns and maintain downside protection against volatile and unpredictable markets. If fetching higher returns is on your mind, then you should build a good portfolio of equity mutual funds depending on your appetite for risk.

Investors who are looking for a debt mutual fund that offers liquidity, may generate stable returns, and has low investment risk they can consider investing in banking and PSU funds. 

What is a banking and PSU fund?

A banking and PSU fund is an open ended debt scheme which predominantly invests majority of its assets in assets in debt instruments of banks, Public Sector Undertakings, and Public Financial Institutions. As per SEBI guidelines, a banking and PSU fund must invest at least 80 percent in PSUs and PFIs. Since SEBI does not specify where the remaining 20% should be invested, it gives fund managers of banking and PSU funds to invest across debt instruments like government securities, commercial papers, treps (tri party repos) etc. Since the underlying securities of a banking and PSU fund enjoy high credit ratings, they are highly liquid and less likely to have credit risk.

Things to consider before investing in banking and PSU fund

If you are unsure whether banking and PSU fund suits your goals, here are a few things to consider before investing –

Understand your investment objective

Investing without a clear objective is not a good idea as investors may not be able to give their investments any proper direction. Investors who have a defined set of goals find it easier to invest rather than those who invest without any objective. Goal based investing may work in favor of investors. If you are ambitious to buy a house or a new car and if you start investing keeping that objective in mind, you are less likely to stop your investments midway. Understand your investment objective and only then consider investing in banking and PSU funds

Take into consideration the quantitative parameters

Some of the basic quantitative parameters include proven track record, offering stable returns across investment horizons, and ability to deliver stable and consistent returns across category average. The banking and PSU you are planning on investing in must have outperformed its benchmark in the past. If the scheme you are planning on investing in ticks all the above boxes, then the next time for investors to evaluate is whether the scheme has managed to deliver best risk-adjusted returns in the past. 

The fund must have a well-diversified portfolio

The underlying securities of a banking and PSU fund must be able to generate decent returns upon maturity. Investing in a fund with a concentrated portfolio will only expose investors to high risk. Apart from this, investors must also ensure that they choose a scheme with a feasible expense ratio. For a fund to have a well-diversified portfolio, it must keep investments in medium and low credit rated securities to minimum.

If you do not understand the intricacies of a banking and PSU fund, we suggest consulting a financial advisor who might help you make an informed investment decision.