Bank & PSU Mutual Funds

Bank & PSU Mutual Funds primarily allocate their assets to debt securities issued by banks and public sector organisations. With a combination of stability and possible growth, these funds try to provide investors with a balance between debt and equity securities.

Stability and safety

Regular income

Potential for capital appreciation

Invests in government-backed securities

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What Are Bank & PSU Mutual Funds?

Bank & PSU (Public Sector Undertaking) Mutual Funds are a subset of mutual funds in India that predominantly invest in debt securities issued by banks and public sector corporations. These funds invest in fixed-income assets such as government bonds, corporate bonds, and other money market instruments.

The portfolio is largely made up of debt instruments with good credit ratings, which minimises the chance of default. Since these securities are issued by large organisations with the highest credit ratings, bank and PSU funds give consistent returns to investors. The debt securities carry nearly zero risks as they are backed by the government.

Investors seeking a cautious investment strategy frequently turn to bank and PSU funds because of their low volatility and stable income. The underlying assets are issued by respected banks and public-sector organisations, providing further security to the investment. These funds are ideal for risk-averse investors seeking capital preservation and consistent income, making them a wise choice for reducing portfolio risks.

Why Add Bank & PSU Mutual Funds in Your Portfolio?

You get stability and security in your investment
Annualised return as high as 7.86%
Returns higher than FDs and other low-risk options
The securities are backed by the government

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Advantages of Bank & PSU Mutual Funds

Here are some of the major advantages of bank and PSU mutual funds that you must know.

Consistency and Predictability
Banking and PSU debt mutual funds are a great option for cautious investors looking for returns that are consistent and predictable. Investors seeking stable income without taking the risk of losses can invest in these funds due to their dependability.
Good for Short Term Investments
These debt funds invest mostly in debt securities with relatively short maturity periods. This makes it ideal for investors who want to stay invested for a short time ranging from 1 to 3 years.
Liquidity Considerations
This aspect explores the features corresponding to liquidity in the case of bank & PSU mutual funds. Since these funds invest most of their assets in government-issued securities with the highest credit ratings, they provide the right balance between safety, yield and liquidity.
Risk Mitigation Strategies
These debt funds can be used to control portfolio risks. Since government-backed securities carry nearly zero risks, their returns are almost guaranteed. Furthermore, they carry low-interest rate risks due to the shorter tenure of investments. So, if you have an equity-heavy portfolio, allocating your money to bank and PSU funds will reduce the overall risks.
Flexibility in Investment
These debt mutual funds invest in different types of debt instruments issued by financial institutions and public enterprises. It can invest in government securities, corporate papers, debentures and other securities, with no restrictions on the securities’ duration. This gives fund managers the flexibility to find the right investment options.
Better Than Fixed Deposits
Bank and PSU funds offer a number of advantages over traditional forms of investments like fixed deposits. While both are safe investment options with guaranteed returns, the debt funds typically offer better returns. That is why these funds are ideal for conservative investors or those looking to part their money for the short term.

Who Should Invest in Bank & PSU Mutual Funds?

Read the pointers below to know who should think about investing in bank & PSU mutual funds.

Investors with Low Risk Appetite
Bank & PSU mutual funds are best for people with low-risk tolerance, like retirees who want to preserve capital or investors parking their surplus cash. Investors who are interested in both growth and caution can invest in these funds as they offer good short-term returns.
Short Investment Horizon Investors
Investors who want to benefit from both consistent income and possible capital growth should consider these debt funds. Investors who are looking for an investment option that will not cause losses in the short term can choose banking and PSU funds.
Income-Oriented Investors
These debt mutual funds are appropriate for investors who are focused on generating a solid and significant income. They can provide a consistent source of income from dividends and interest generated from the securities they invest in.
Conservative Investors
Explain in detail how bank & PSU mutual funds fit the risk tolerance of conservative investors that prioritise capital preservation. It is necessary to talk about the safety and return stability of investing in securities issued by public sector companies and banks.
Pensioners and Retirees
Retirees and pensioners value having a reliable source of income in their later years. They may prefer debt funds like bank and PSU funds, as they do not want to take any risk.
Investors Looking for Credit Quality
Bank and PSU mutual funds invest in AAA-rated debt securities belonging to large government institutions and banks of India. These are some of the largest companies in the country and thus, they carry the highest credit ratings. If you are looking for high liquidity and credit quality, these funds are for you.

Points to Consider before Investing in Bank & PSU Mutual Funds

There are a few points you must consider before investing your money in these funds. They are as follows.

Interest Rate Sensitivity
Examine in detail how susceptible bank & PSU mutual funds are to interest rate fluctuations. You need to understand how changes in interest rates affect the performance of these funds and how the fund manager mitigates interest rate risk.
Credit Quality of Holdings
Analyse how important credit quality is about these funds. It is required to focus on how risk and return are impacted by the credit ratings of the underlying assets. Check the fund portfolio to know the overall credit quality of a bank and PSU mutual fund before investing.
Expense Ratios and Fees
Dealing with the different costs related to PSU and Bank mutual funds, such as expense ratios and exit loads. It is needed to present details about how the fees affect total returns and choose funds with sensible cost structures.
Historical Performance and Track Record
Analysing the past performance as well as track record of bank & PSU mutual funds is crucial. Put adequate focus on examining the fund’s historical performance in light of its investing strategy. Compare the performance to the fund's competitors, the market scenario and the broader economy.
Fund Manager Expertise
Concentrating on how fund managers influence the performances of these funds. It’s important to assess the backgrounds of fund managers along with their experiences, and lastly, performance history to make wise investment choices.
Redemption and Liquidity Terms
Check the fund’s redemption policies and liquidity requirements. Pay attention to any particular issues with the redemption procedure, the duration of lock-ins, and the management of liquidity during high redemption demand times.

Limitations of Bank & PSU Mutual Funds

Here are some key limitations to look for before you start your investment journey with bank and PSU mutual funds.

Market Risks
As with all market-linked investments, there are some market dangers that come with owning banking and PSU mutual funds. It is critical to understand the effects of external shocks, along with market volatility, and downturns of the economy that might affect a fund’s performance.

Lack of Aggressive Growth

Investors looking for aggressive capital growth may be disappointed by bank & PSU mutual funds. These funds are made for cautious investors and those looking for substantial returns will likely not meet their expected goals.

Interest Rate Risk
Offering detailed descriptions regarding the particular interest rate risks that buyers of these products need to be mindful of. Like all debt funds, an increase in market interest rate lowers the price of debt securities held by the bank and PSU fund and vice versa. Altering rates of market interest may affect the performance of the fund as a whole as well as the valuation of the debt instruments included in the portfolio.

How to start investing in Bank & PSU mutual funds through INDmoney?

After you have understood what Banking And PSU funds are, it is time for you to start your investment process with INDmoney. Below are some simple steps to follow to start your mutual fund's investment journey with us.

Step 1
Download the INDmoney app and create your free investment account by completing your KYC ( Know Your Customer).
Step 2
Once your Free investment account is ready, you can either search for a Banking And PSU fund or go to the mutual fund section and tap on Banking And PSU funds.
Step 3
Choose a Banking And PSU fund by looking at aspects like past returns, volatility, downside capture ratio, AUM, Expense ratios and underlying stocks and sectors.
Step 4
You can choose to set up SIP in Banking And PSU funds or even invest as lumpSum. Once you are on the individual Banking And PSUFund page click from the bottom “One-time” for lump sum investment or “SIP” for systematic investment plan.
Step 5
Choose the amount that you want to invest as SIP or LumpSum
Step 6
Set up payments. If you choose to set up SIP in Banking And PSU funds, you can do a free automatic pay set up via bank mandate or UPI. If you choose to invest in lumpsum (one-time) then you can pay via UPI, netbanking, NEFT or RTGS.

Should You Choose Bank & PSU Mutual Funds?

Overall, bank & PSU mutual funds can be a great option to invest in if you are someone who wants security in your portfolio. Since the securities these funds invest in are backed by the government, it gives a sense of security to investors regarding returns. So why wait anymore? Download the INDmoney app today and go on with your investment journey.

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Frequently Asked Questions

Debt securities issued by banks and public sector enterprises are the main source of returns for Banking and PSU debt funds, which concentrate on fixed-income instruments. Equity funds, on the other hand, primarily invest in equities and have a greater risk-reward ratio. While the latter seeks financial appreciation by participation in the equity market, the former wants stability and income.

These funds are heavily influenced by interest rates, especially their debt portions. Fund returns may be impacted by the value of current debt instruments declining when interest rates rise. On the other hand, declining interest rates may result in capital gains.

Yes, the goal of these funds is to combine growth and stability in a balanced way. They provide stability by concentrating on debt instruments from reliable sources, and they also offer growth in the form of possible capital appreciation.

Financial objectives, investment horizon, and risk tolerance are taken into account. It is critical to evaluate the fund's past performance, fees, fund management experience, and the credit quality of its assets.

External shocks that impact the stability and performance of these funds include geopolitical upheavals and global economic crises. Their conservatism and emphasis on reputable public institutions, however, can offer a high degree of resistance.

These funds could provide tax benefits to investors who do not have a taxable income. This is because capital gains (regardless of the holding period) are added to their gross income and taxed as per applicable tax slabs. The tax ramifications of capital gains, dividends, and other tax-saving features linked to certain funds should be known to investors.

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