Looking for a low-risk debt fund that offers better returns than a savings account or fixed deposit? A Banking and PSU Fund might be a smart choice.
Let’s break down what it is, how it works, and whether it’s right for your investment goals.
What Is a Banking and PSU Fund?
A Banking and PSU Fund is a type of debt mutual fund that primarily invests in:
- Debt instruments issued by banks
- Public Sector Undertakings (PSUs)
- Public Financial Institutions (PFIs)
These funds are regulated by SEBI and must invest at least 80% of their assets in debt securities from these sectors.
Why Do Investors Choose Banking and PSU Funds?
- Lower risk than equity or hybrid funds
- Generally invest in high-quality debt instruments
- Offer better returns than liquid or savings accounts
- Suitable for short- to medium-term goals (6 months to 3 years)
How Do Banking and PSU Funds Work?
These funds earn income through:
- Interest from bonds or debentures
- Capital gains if interest rates fall and bond prices rise
They don’t invest in stocks. Instead, they focus on safety + moderate returns.
Past Returns (As of 2024–2025 Trends)
| Fund Type | Average 1-Year Return | Risk Level |
|---|---|---|
| Banking & PSU Funds | 6.5% – 7.5% | Low to Moderate |
| Liquid Funds | 4% – 5% | Low |
| Equity Funds | 10% – 15% (higher risk) | High |
Returns vary depending on interest rate cycles and bond performance.
Who Should Invest in Banking and PSU Funds?
This fund is a good fit if you:
- Want stable, low-volatility returns
- Have a short-to-medium term goal (like tax saving, down payment, or emergency fund)
- Prefer less risky options compared to equity funds
- Are looking to diversify your debt portfolio
Risks and Things to Watch
- Interest Rate Risk: If rates rise, bond prices may fall.
- Credit Risk: Low, since most holdings are in top-rated PSU and bank bonds.
- Exit Load: Some funds may charge if you withdraw within a certain time (usually 6–12 months).
- Taxation: Capital gains are taxed as per your income slab if held for less than 3 years.
FAQs
Q1: Are Banking and PSU Funds safe?
A. They are relatively safe, as they mostly invest in AAA-rated bank and PSU instruments — but not entirely risk-free.
Q2: How long should I invest in them?
A. Ideal for 6 months to 3 years, depending on the interest rate environment and your goals.
Q3: Can I lose money in a Banking and PSU Fund?
A. While rare, losses can happen if interest rates rise sharply or if there’s unexpected credit risk — but these are generally lower compared to corporate bond or equity funds.
Q4: How are they taxed?
Short-term (< 3 years): Taxed as per your income slab
Long-term (> 3 years): Eligible for indexation benefit (as per latest tax rules)
Key Takeaways
- Banking and PSU Funds are low-risk debt mutual funds
- Great for capital preservation with moderate returns
- Safer than equity, better returns than savings accounts
- Best used for short-term parking or stable income needs
