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Banking and PSU Funds : Features, Suitability & Advantages

Last Updated : 14 Dec, 2023
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What are Banking and PSU Funds?

Banking and PSU funds are short-term debt funds that offer a decent amount of returns and also minimise risk by investing in top-rated debt instruments containing securities that are issued by banks and public sector undertakings. Such listed companies are large-cap companies and have AAA ratings from the top credit rating agencies like CRISIL, etc. As per SEBI guidelines for mutual funds, banking, and PSU Funds have to invest at least 80% of their total proceeds in debt instruments issued by such institutions. As a result, these funds have high-ranking credit quality compared to other debt funds offered in the mutual fund market. Banking and PSU funds maintain a favourable balance between liquidity, safety, and yield. Banking and PSU funds hold the phrase “safe investment for conservative investors”.

Features of Banking and PSU Funds

1. Minimum Investment: Under the Banking and PSU Funds, a minimum requirement of 80% of total assets is to be invested in debt instruments issued by Banks, Public Sector Undertakings, and Public Financial Institutions.

2. Risk Mitigation: Banking and PSU debt funds consist of debt tools that are related to reputed public sector companies and top-performing banking organisations. Hence, the risks associated with banking and PSU fund investment are minimal, also the fund amount is secured by central government backing. Debt funds by characteristics have lesser risk.

3. High Liquidity: Banking and PSU funds invest in AAA-rated debt instruments. This makes these funds possess high liquidity and also have superior credit quality as compared to other funds. Investors can invest in these schemes based on investment objectives and financial goals.

4. Better Return: Banking and PSU funds usually provide higher returns than fixed deposits and also help the investor tackle inflation. If an investor is looking for alternative options to bank deposits, they may opt for this mutual fund scheme.

Purpose of Banking and PSU Funds

1. To Minimize Risk Factors: Banking and PSU Funds are seen by those investors who look for lower risk in investment schemes. The majority of investment is done in high-rated debt securities, which provide lower risk and also they are backed by the government.

2. To Maintain Regular Income: Banking and PSU funds deliver constant and regular return flow to the investors, sometimes banking and PSU funds may deliver returns higher than inflation, and even deliver better returns than a fixed deposit.

3. To Achieve Short-Term Objectives: Banking and PSU funds are excellent choices to achieve short-term objectives, people with an investment horizon of one to three years can invest in banking and PSU funds along with the lowest risk degree.

4. To Diversify the Portfolio: Banking and PSU funds are good investment options in case an investor wants to diversify their portfolio and experience the features and benefits of debt-based securities. A small investment in equity along with banking and PSU funds might help your portfolio grow with pace.

Who should Invest in Banking and PSU Funds?

1. People Who Want to Start Investing in Mutual Funds: Banking and PSU Funds are an excellent option for those investors who are beginners in the field of mutual fund investment as Banking and PSU Funds have lower risk as compared to any other fund scheme. Lower risk will attract the investors and also give them confidence about the mutual fund market.

2. Investors Who Have a Low-Risk Appetite: Banking and PSU Funds are ideal for those investors who look for lower risk in investment schemes. The majority of investment is done in high-rated debt securities, which provide lower risk and constant returns to the investors. Returns help investors to beat inflation and grow their portfolios at pace.

3. Investors Who Look for Funds with Lower Expense Ratio: Almost all Banking and PSU Funds have lower expense ratios as compared to the expense ratio of other funds in the mutual fund market. The expense ratio is also seen as a decision-maker for investment as the lower the expense ratio higher the net return to the investor.

4. Investors Who Look for Diversified Investment: Banking and PSU Funds diversify their investment as they invest a lot in debt, and even though you are invested in a single fund, you can experience investing in different and big banks and PSUs.

5. Investors With Mid to Short-Term Goals: Banking and PSU Funds can be ideal investment horizons if the investment horizon is around one to three years. So for short-term goals, this could be your go-to fund.

Factors to Consider Before Investing in Banking and PSU Funds

1. Diversification: Banking and PSU Funds are managed by fund managers, and every fund will have its own set of parameters and composition of different top-rated debt instruments containing securities that are issued by banks and public sector undertakings. So, the investor needs to study the individual composition that fits his investing parameter.

2. Time Horizon: If an investor has a short-term horizon, only then he/she should consider banking and PSU Funds, as they have proved to be beneficial in the long run, i.e. around a period of one to three years or more. If investors have long-term goals and are looking for a fund, banking, and PSU Funds might not be the right choice for them.

3. Tax Implications: Investors need to ascertain the tax implication of the fund, if he/she is ignorant about the tax implication, they might not get a fruitful return out of it.

4. Risks: Investors should consider his/her risk appetite before investing. Although banking and PSU Funds are less prone to risks, if the investor wants to minimise the risk, he/she should approach a fund that has lower dependence on equity.

5. Expense Ratio: Investors should precisely go through the investment terms and conditions, and should carefully understand the expense ratio, as a fund with a lower expense ratio is always better than a fund with a higher expense ratio.

Advantages of Banking and PSU Funds

1. Diversification of Capital: As banking and PSU Funds, invests capital among different top-rated debt instruments containing securities which are issued by banks and public sector undertakings, this gives exposure of different classes of asset to the investor and balances the portfolio as per the prevailing market condition.

2. Mitigation of Risk: Under banking and PSU Funds, the investment is made under securities issued by banks and the public sector and these sectors are not prone to risk, and they will perform constantly as per their characteristics. Bank and PSU funds mitigate the risk of losing capital, as they provide constant and regular income.

3. Steady Returns: Banking and PSU Funds being diversified in nature has the main advantage of gaining returns even in volatile market conditions. Investors who have low risk-bearing capability, prefer Banking and PSU Funds for steady returns. Under banking and PSU funds, the funds are backed by the central government.

4. Flexibility: Banking and PSU Funds have a high degree of flexibility associated with them, as at any time an investor can manage his/her holding between selected securities if the prevailing market condition is not favourable to his/her portfolio. Most of the time the fund managers focus on debt-based funds to minimize the risk factor for investors

5. Expert Opinion: Banking and PSU Funds being managed by an experienced fund manager gives investors the best choice for a portfolio. Investors can avail the benefit of investing in top-rated securities of PSUs and banks while staying invested in a single fund.

Disadvantages of Banking and PSU Funds

1. Low Return: These funds have high demand in the market, as there are minimal risk factors associated with this fund. However, these funds generate lower returns to investors as there is no substantial fluctuation in the stock price of PSU and banks, hence the returns are not substantial.

2. Not Ideal for Long Term: Such banking and PSU funds are not an ideal instrument for investors who are looking for long-term investment, people with short-term goals prefer banking and PSU funds.

3. No Guarantee of Success: The allocation of securities in Banking and PSU Funds stands different between different fund managers or AMC, so the returns will also differ as per the allocation. The portfolio by nature gives the investor an element of discretionary exposure due to the ability that the fund manager possesses to change the mix of securities and selection of the PSU sector in the fund.

4. No Customisation: The dynamics of investments in banking and PSU funds can not be controlled by investors, as it depends upon the asset management company or fund manager in which they are investing. The investor does not directly invest in the asset rather they invest in the fund, which contains different asset classes, and an investor can not customize his investment in the asset class.

5. Taxation on Short-Term Holding: If an investor holds Banking and PSU Funds for a short-term duration, say 1 year, he/she shall be liable to pay tax as per their applicable income tax slab rates, and no benefit of indexation will be available.

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