Banking and PSU Funds
Banking and PSU Funds

Banking and PSU Funds 4 Best Types of Strategies

Banking and PSU Funds

In 2018, SEBI (Securities and Exchange Board of India) launched a special type of fund which is popularly known as the banking and PSU fund. Namely, these funds are open-ended funds that mainly invest in banks, public sector undertakings, and public financial institutions. This fund has a fixed income.

Banking and PSU Funds
Banking and PSU Funds

Investment is made in the debt and money market through banking and PSU funds. Hence it has a fixed income. As per SEBI norms, 80% of the share is required to be invested in the bank’s financial institute.

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Investment strategy

4 types of strategies are important in this investment.

1. Maintaining High Credit Quality: 

Schemes like this mostly aim to invest in high-quality papers.

2. Short to Moderate Duration Profile: 

These schemes carry moderate interest rate risk. The portfolios of banking and PSU funds have a tenure of 2 to 5 years.

3. Hold till Maturity: 

Such schemes should be held till maturity. These are generally held for maturity. Such schemes receive interest-free principal on maturity from debt and money markets.

4. Active management for the medium term: 

Fund managers call active periods based on their interest rate outlook. In the last year interest rates fell due to double-digit growth in these schemes.

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Banking and PSU Funds
Banking and PSU Funds

Why invest in banking and PSU funds?

Interest risk in banking and PSU funds is generally moderate. Your money benefits even after low-interest rates. The downside risk is limited in an environment of rising interest rates. These schemes generally offer attractive returns on maturity due to good credit quality.

Firstly, one of the most important factors that have enabled banking and PSU funds to deliver good returns is better credit quality. The instruments in which these schemes invest as per SEBI guidelines are inherent in high credit quality. This is because they have the support of the government due to their sovereign status. Banks (both the public sector and private sector) are given high credit ratings because they are regulated entities and are well capitalized.

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And the second factor about this is have outperformed most debt fund categories. Average annual returns of many other debt fund categories have outperformed the banking and PSU fund categories across the maturity profile spectrum. Banking and PSU funds outperform most debt fund categories.

The attraction for Banking and PSU Funds

Considering the current economic environment of the market, it can be said that the pace of development may remain slow. RBI may cut interest rates further. As such, the expectation of better performance by debt mutual funds increases. These can outperform traditional fixed income products like FDs etc. Banking and PSU funds are well suited to the current environment as they have attractive yields, moderate interest risk, and most importantly high credit quality.

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These funds are suitable for moderate-risk investors. If the investor invests for more than 3 years then he can enjoy long-term capital gains. Investors should consult their financial advisors if banking and public sector undertakings are suitable for their investment needs.

Banking and PSU Funds
Banking and PSU Funds

Market conditions

Given the current economic environment in the market, with growth slowing and the RBI committed to a tight monetary policy, debt mutual funds are likely to outperform traditional fixed-income products. Also, the business and business-to-business credit environment in India have been deteriorating for some time now. The debt servicing capacity of many issuers may be in doubt due to the lockdown. Banking and PSU funds are well suited to the current environment as they have attractive yields, moderate interest rate exposure, and most importantly, high credit quality. These funds are suitable for medium-risk investors. If the investor invests for more than 3 years then he can enjoy long-term capital gains. Investors should consult their financial advisors if banking and public sector enterprises are suitable for their investment needs.

Banking and PSU Funds