Banking & PSU Funds

Banking and PSU mutual funds are types of debt funds that invest in debt securities issued by banks, public sector undertakings (PSUs), municipal bonds, and public financial institutions. However, the rule is to invest at least 80% of the corpus in the above categories.

Here, the funds invest in high-quality debt securities, often from large, well-rated (AAA) entities. These ratings ensure minimal credit risk and a steady growth rate for the investors.

For the first time, the banking and PSU funds were launched by the Securities and Exchange Board of India (SEBI) on October 1, 2017. It was part of the newly launched 16 schemes aimed at bringing uniformity and investor awareness about mutual funds.

Planning to invest in banking and PSU mutual funds? Here's what you can receive in exchange.

Key Benefits of Banking and PSU Mutual Fund:

• Reduced Credit Risk: Since these funds invest in debt instruments backed by the government and major banks, the credit risk is significantly lower. Additionally, credit ratings from reputable agencies for these instruments further enhance their safety profile.
• Stable Rates: These funds aim to provide stability and predictability over the short to medium term by investing in premium, highly rated debt securities.
• Liquidity: Since they're open-ended schemes, you can buy or redeem your units on any business day. It gives you both flexibility and quick access to your money whenever needed.
• Diversification: By making investments across a range of banks and PSUs, these funds aid in portfolio diversification and risk mitigation for sector-specific risks.

Banking and PSU mutual funds work by pooling money from investors and investing it primarily in high-quality debt instruments issued by banks, public sector undertakings (PSUs), and top-rated financial institutions.

Here's a simple breakdown of how they function:

• Fund Allocation: The AMC will invest at least 80% of this debt fund's assets in debt securities (as mentioned above), and the rest resides in bonds, debentures, T-bills, mutual fund units, Tri-Party Repo, margin, calls, swaps, Collateralised Borrowing and Lending Obligation (CBLO), etc.
• Credit Ratings & Govt-backed Securities: During this process, the AMC will also consider securities with high credit ratings (typically AAA) - to ensure lower default risk and greater stability for investors.
• Income Generation: Alongside, these securities also generate regular interest income, which becomes the primary source of income for investors.
• Active Management: For better management, the fund managers actively monitor market interest rates, credit quality, and maturity periods to balance returns while minimizing risk.
• Redeemption/Withdrawal of Funds: As open-ended schemes, investors can enter or exit from the Banking and PSU fund at any time.

These funds are suitable for:

• Individuals seeking lower-risk investment options with stable yields.
• Investors with investment horizons ranging from one to three years.
• Those looking to diversify their debt portfolio with high-quality securities.

With Anand Rathi, investing in Banking and PSU funds isn't just convenient — it's guided by research, ease, and trusted advice.

Before investing, consider the following factors:

• Interest Rate Risk: These funds can be sensitive to interest rate movements. An increase in interest rates may lead to a decrease in the value of the fund's holdings.
• Credit Quality: Ensure the fund invests in high-credit-quality instruments to minimise default risk.
• Expense Ratio: Lower expense ratios can enhance net yield over time.
• Investment Horizon: Do consider the timeframe you wish to stay invested in these debt funds. Mostly, these funds tend to have short- to medium-term investments.

If purchased after April 1, 2023, capital gains from banking and PSU funds will be taxed at the investor's income slab rate, regardless of the holding period.

But if you've purchased before April 2023, the taxation differs.