Best Banking and PSU Mutual Funds

Updated on: Jan 13th, 2022


6 min read

Best Banking and PSU funds are debt funds that concentrate their asset portfolio towards equity and equity-linked securities of banks and public sector undertakings. We have covered the following in this article on the best banking and PSU funds:

Introduction to Banking and PSU Funds

Banking and PSU funds invest at least 80% of their portfolio in debt securities issued by banking institutions and public sector undertakings in India. These funds may also invest in debt instruments issued by municipalities. Generally, the debt securities that constitute the portfolio of banking and PSU funds are rated AAA and above.

The fund manager and his team of analysts and market researchers focus on picking up the top-performing debt instruments issued by Navratna and Maharatna companies. Investing in banking and PSU funds is considered safe as the government backs the underlying companies, and hence, the risk of default is low.

Top Banking and PSU Funds

The following table shows the best-performing banking and PSU funds based on the past 3-year and 5-year returns:

Mutual fund 5 Yr. Returns 3 Yr. Returns Min. Investment Rating

Who Should Invest in Banking and PSU Funds?

As banking and PSU funds invest in well-established government-backed companies, they are generally considered as a safe investment option. Hence, even risk-averse investors may consider investing in these funds. Also, anyone looking for a regular income may invest in these funds as they are known to pay regular dividends. Investing in these funds will provide the benefit of exposure towards a diversified portfolio constituted by fixed-income securities issued by banking and public sector undertaking institutions.

Taxability of Banking and PSU Funds

After the Budget 2020 amendments, dividends provided by all mutual fund schemes are added to your overall income and taxed at the income tax slab you fall under. This way of taxing dividends in the hands of investors is known as the classical way of taxing dividends. The short-term capital gains realised on redeeming units within the holding period of 36 months are added to your overall income and taxed at your income tax slab rate. Long-term capital gains realised on selling units after a holding period of 36 months are taxed at 20% after indexation.

Risk of Best Banking and PSU Funds

The risk possessed by banking and PSU funds is considered to be much lower than most of the debt funds. This is because the fund invests mostly in the high-rated debt securities issued by well-established state-backed companies. Hence, the risk associated with these funds is on the lower side. However, since banking and PSU funds are a class of debt funds, they essentially carry credit risk, liquidity risk and interest rate risk.

Things to Consider Before Investing in Banking and PSU Funds

The following are some of the factors that must be considered while investing in the best banking and PSU funds:

  • Investment horizon: You may not consider investing in banking and PSU funds if your investment horizon is shorter than one year. These funds are apt for those who can stay invested for one year to three years.
  • Returns: These funds may not provide the benchmark-beating returns as they invest in well-established companies. These funds are known to provide stable and consistent but somewhat lower returns as compared to an equity fund.

Advantages of investing in Gilt Funds with 10 Year Constant Duration

The following are some of the most significant advantages of investing in banking and PSU funds:

  • These funds are known to provide regular dividend payouts.
  • The performance of these funds is relatively stabler as well-established state-backed institutions issue the underlying securities.
  • The risk levels associated with these funds are on the lower side as state-backed institutions issue the underlying securities.
  • Investing in these funds is suitable for risk-averse investors.

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Quick Summary

Banking and PSU funds focus on equity-linked securities of banks and public sector undertakings. Considered safe due to backing from the government, offering regular income, and low risk. Factors to consider before investing include investment horizon and expected returns. Dividends from mutual fund schemes are taxed, while capital gains have different tax rates. Risks include credit, liquidity, and interest rate risks. Advantages include stable performance, regular dividends, and lower risk levels.

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