Home >Mutual Funds >News >Banking and PSU mutual funds outshine most debt funds: All you need to know

Banking & PSU funds have become popular in the last one year. Their size has more than doubled since then. The category manages assets worth 96,816 crore as on June 30. These funds by nature are less risky among the debt fund categories. Sebi defines a Banking & PSU Funds as an open-ended debt scheme predominantly investing in debt instruments of banks, public sector undertakings and public financial institutions. A Banking & PSU fund has to invest a minimum of 80% of its total assets in the public sector undertakings. Here's everything you want to know about the fund:

Where do Banking & PSU Funds invest?

These funds primarily invest in top-rated instruments of the debt market – bonds and debentures issued by Banks, PSUs and PFIs. Some common examples of securities held by the category include NABARD, Indian Railway Finance Corporation, Food Corporation of India, Export Import Bank of India, National Highways Authority of India, Gail, NHPC, NTPC, Power Finance Corp and Power Grid Corporation of India.

Most of these bonds and debentures are AAA-rated. The risk of default is very low in case of these instruments as they are supported by the government.

According to a report by Mirae Asset Mutual Fund, "analysis of the credit quality of Banking and PSU debt funds shows that exposure to higher-rated papers (AAA\A1+ and Government of India securities and treasury bills (GOI/T-Bills) remained constant in the one year that ended this May despite deterioration in investor sentiments."

Credit rating profile of Banking and PSU funds (Source: Mirae Asset Mutual Fund Report)
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Credit rating profile of Banking and PSU funds (Source: Mirae Asset Mutual Fund Report)

The report adds,"Credit quality comparison among debt funds shows that Banking and PSU funds have higher share of investments in top-rated papers versus most other categories.The average exposure of these funds to AAA and A1+ rated papers for year ended in May was 79% compared with 24% for credit risk funds, 81% for corporate bond funds, 27% for dynamic bond funds, 36% for medium duration funds and 38% for medium to long duration funds."

Also, the underlying securities of these funds enjoy relatively higher liquidity in the bond market, enabling the fund manager to implement portfolio churns.

Banking & PSU funds outshine most equity and debt fund categories

Comparing Banking & PSU fund to equity funds is an apple to orange comparison. But it is interesting to know that given the recent times of high volatility in debt market and Covid 19 outbreak, the category has fared better than most equity fund categories except a few sectoral mutual funds.

In the last one year, the category on an average has given 11.05%. In five years, it has given 8.62%. This category has outperformed all debt fund categories as well, except long duration funds in the last one year.

How are Banking & PSU funds taxed?

All gains arising on investments held for over three years are taxed at 20% after providing for indexation. Short term capital gains are taxed as per the applicable slab rate.

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