Banking and PSU Funds explained

In today’s fast-changing investment world, Debt Mutual Funds have become a go-to for investors who prefer stability over risk. And among these, Banking and PSU Funds stand out, offering a sweet spot between safety, liquidity, and potentially better returns than traditional savings avenues.

What are Banking and PSU Funds?

Banking and PSU Funds are a type of Debt Fund that mainly invests in bonds issued by banks, public sector companies (PSUs), government-backed financial institutions, and municipal bodies. According to the SEBI rules, the funds must invest a minimum of 80% of their money in such bonds. The rest can go into other safe debt and money market investments.

These funds are best suited for you if you are looking for short- to medium-term options with relatively stable returns and lower risk compared to Equity Funds.

Features of Banking and PSU Funds

How do Banking and PSU Funds work?

Banking and PSU Funds collect money from you and use it to buy bonds issued by banks and PSUs. These bonds are carefully chosen by fund managers based on their safety, return potential, and maturity period. These funds have a connection with interest rates — when interest rates go up, bond prices go down, and when rates fall, bond prices go up.

This affects the fund’s net asset value (NAV), but the effect is usually small because these funds invest in shorter-term bonds. Since they invest in high-quality government-backed institutions, the risk of default is low. Plus, experienced fund managers manage the portfolio to keep a good balance between returns and safety.

Benefits of Banking and PSU Funds

• Enhanced safety: Government backing of many underlying securities provides stronger credit protection than Corporate Bonds.
• Better liquidity: These funds typically invest in highly liquid instruments, making them easier to buy or sell.
• Return potential: They typically offer returns that can potentially outpace traditional savings instruments over the medium term.

How should you invest in a Banking and PSU Fund?

• Identify your investment objective, such as stable income or capital preservation.
• Compare Banking and PSU Funds based on returns, portfolio quality, and fund manager track record.
• Ensure the fund suits your risk appetite and is for a medium-term investment.
• Choose your investment method — lump sum for surplus funds or Systematic Investment Plans (SIPs) for disciplined investing.
• Monitor fund performance periodically and review your portfolio based on financial goals.

Taxation rules of Banking and PSU Funds

Banking and PSU Funds, being debt-oriented mutual funds, are subject to uniform taxation rules introduced in 2023. Under the current tax regime (as of FY 2025-26), capital gains from such funds are considered short-term regardless of the holding period. This means you will be taxed according to your individual income tax slab, and the earlier advantage of paying a lower tax rate on long-term holdings with indexation has been removed. It’s important to factor this in when comparing them with traditional fixed-income options.

Also Read: What is Step-up SIP in Mutual Funds?

Conclusion

Banking and PSU Funds offer a reliable investment option for conservative investors. With investments in high-quality debt instruments from banks and public sector undertakings, they provide enhanced safety. These funds are designed to deliver better returns than your traditional FDs or Savings Accounts, with relatively low risk. A short to medium-term horizon makes them ideal for stability-focused portfolios. Professional fund management ensures a balanced mix of yield and credit quality.

Disclaimer: This article is for information purposes only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.