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What Are Banking and PSU Funds & Who Should Invest?

This blog will help you understand what a Banking and PSU fund invests in, how it works, its advantages and limitations, and how to invest in the best Banking and PSU funds using Cube Wealth.
February 3, 2021

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You may be familiar with the age old Indian dream of getting a job at a PSU and living happily ever after. But you don’t necessarily have to work in a PSU to reap the benefits. 

Meet Banking and PSU funds. Banking and PSU funds are open-ended debt schemes that are considered to be safer than many other debt funds due to the nature of their investments. 

In this blog, we’ll look at every pertinent detail of Banking and PSU funds so that you can understand if it’s a suitable investment option for you. 

Features Of Banking and PSU Debt Funds

A Banking & PSU debt fund invests in debt instruments of banks like NABARD, HDFC, Bank Of Baroda, etc. and Public Sector Undertakings like BPCL, Indian Oil Corporation, Oil and Natural Gas Corporation, etc.  

Banking & PSU debt funds have negligible credit risk since they invest in bonds and debentures of public sector companies and banks that have a very high credit rating (AAA/A1+ rated). 

However, Banking & PSU debt funds are prone to interest rate fluctuations which have an impact on the NAV and returns. The fluctuations can be attributed to RBI’s repo and reverse repo rates.  

But Banking & PSU funds are widely considered to be safer than other debt funds like arbitrage funds and dynamic bond funds because 80% of the fund’s portfolio is allocated to public sector undertakings.

3 Advantages Of Banking and PSU Debt Funds

1. Low Risk

PSUs are known to be financially stable and more importantly, pay back their debt. This is primarily why Banking & PSUs are considered to carry low risk since 80% of their portfolio is allocated to these financially sound institutions.

2. Better Returns Than FDs

The average historical returns of Banking & PSU debt funds ranges from 7-10% (3+ years) that’s better than your average FD that generates a return of 4-5% at the most. 

Read this blog to know about investment options better than FDs

3. High Liquidity

The debt securities that a Banking & PSU fund invests in are known to be very liquid. This means that the fund manager has the opportunity to leverage the high liquidity to execute more trades. 

Risks Associated With Banking and PSU Debt Funds

Banking & PSU debt funds are negatively affected by increasing interest rates. In simple words, if the interest rate increases, the Banking & PSU fund may not generate desirable returns.

But if you’re investing in Banking & PSU debt funds using a reliable app like Cube Wealth, Wealth First, Cube’s advisory partner, will recommend whether you should buy or sell based on the impact of interest rate fluctuations.

Banking & PSU debt funds are relatively safe but there are other debt funds like liquid funds and ultra short term funds that are safer and do not take a big hit when interest rates fluctuate. 

Cube Wealth gives you access to all these debt funds along with others like:

1. Banking & PSU Funds

2. Liquid Funds

3. Ultra Short Term Funds

4. Overnight Funds

5. Money Market Funds

6. Corporate Bond Funds

7. Dynamic Bond Funds

Download the Cube Wealth app to know more about the best debt funds.    

Limitations

1. Short Term Focus

Since Banking & PSU funds invest in government-backed debt securities that mature in 1 to 3 years, the fund may not be ideal for long term investment (5+ years). 

On the other hand, Banking & PSU debt funds have been known to generate an average return of 6-8% after 5 years, which is better than most bank savings accounts and FDs. 

Thus, you’d be better off consulting a wealth coach to know if you should add Banking & PSU funds to your portfolio based on your goals.

2. Lower Returns Than Equity Funds

Banking & PSU funds invest in debt securities of large-cap companies but generate lower returns than a large-cap fund that invests in the equity of the same large-cap companies. 

This is an interesting contradiction. But it may not come as a surprise to many investors as Banking & PSU funds are, after all, debt funds that are primed to offer low risk, low rewards. 

Read this blog to know more about the best equity funds you can invest in for 2021.

Taxation Of Banking & PSU Debt Funds And Tax Benefits

Banking & PSU funds are debt funds, so they’re taxed as such:

 

Parameter

Short Term Capital Gains

Long Term Capital Gains

Holding Period

< 3 years

> 3 years

Tax

As per I-T slab

20% 

Indexation Benefits

No

Yes

Banking and PSU fund – Performance History

We’ve established that Banking & PSU funds have the potential to generate better returns than FDs over 1, 3 and 5 years. Here’s a look at the average returns generated by Banking & PSU funds Vs FDs:

 

Average Returns

Banking & PSU Funds

Fixed Deposits**

1 Year

8-9%

6%

3 Years

9-10%

5.85%

5 Years

8-9%

5.40%

*Note: Facts & figures are as of 02-02-2021. The above-mentioned data comprise of publicly available information from Google. Download the Cube Wealth app for the latest information. **FD rates may vary based on the bank. 

Who Should Invest in Banking and PSU Fund?

Banking & PSU debt funds are known to carry a lower risk than most other debt funds. Thus, conservative investors who want a relatively safe mutual fund in their portfolio may benefit from Banking & PSU funds.

Even aggressive or moderately aggressive investors may benefit from the stability that Banking & PSU debt funds offer. At the end of the day, Banking & PSU debt funds are market-linked instruments.

Every market linked instrument carries risks of its own, however negligible. The best way to tackle this risk would be to invest using a trustworthy app like Cube Wealth

How To Invest In The Best Banking & PSU Funds?

There are several platforms you can invest to invest in Banking and PSU funds. But the Cube Wealth app helps you invest in the best Banking and PSU funds with trusted advice from Wealth First. 

Wealth First handpicks a set of best Banking and PSU funds that Cube users can invest in every month. Moreover, you can use two convenient options on Cube Wealth to invest in Banking and PSU funds:

  • Lumpsum: One-time, large investment
  • Systematic Investment Plan (SIP): Periodic, small investment

But there’s more, Cube Wealth simplifies mutual fund SIPs further with the QuickSIP and SuperSIP:

  • QuickSIP: Take a risk quiz; get curated funds; invest via SIP
  • SuperSIP: Toggle SIP amount; Change SIP date; Snooze payments

SuperSIP is only available on Cube Wealth. Download the Cube Wealth app to invest in the best Banking and PSU funds and mutual funds today. 

Best Banking & PSU Debt Funds For 2021

1. IDFC Banking & PSU Debt Fund

  • 1-year returns: 9.38%
  • 3-year returns: 9.80%
  • 5-year returns: 8.55%

2. Axis Banking and PSU Debt Fund

  • 1-year returns: 8.32%
  • 3-year returns: 9.17%
  • 5-year returns: 8.60%

Cube’s mutual fund advisory partner, Wealth First, has a history of beating the market by ~50%. Watch this video to learn more about Wealth First



Shriram Shekhar
Shriram is a Consultant at CubeWealth. He has developed cutting edge IT products for over 2 years before turning to his passion for the written word. His love for philosophy, developing products, and empowering people through quality content is what got him to CubeWealth.

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