Banking and PSU (public sector undertaking) debt funds primarily invest at least 80% of their corpus in obtaining debt instruments issued by banking institutions and other public sector companies. As per a recent amendment announced by SEBI in December 2017, debt securities issued by municipal bodies can also be included in the portfolio of such a banking and PSU fund. Such listed companies are usually large-cap and have AAA- rating from the top credit rating agencies in the country.

Features of the Best Banking and PSU Debt Fund

A banking and PSU debt fund is one of the most popular types of mutual funds, as it has nominal risk associated with the total investment. Fund managers mainly target the Maharatna and Navratna companies to build the portfolio, as they have a history of yielding substantial gains.

The characteristics of a banking and PSU fund can be described as follows –

    1. Debt instruments such as debentures, bonds, certificates of deposit, etc. comprise 80% of the corpus.
    2. Companies issuing banking and PSU funds have a minimum AAA- credit rating from the best agencies.

Banking and PSU fund – Performance History 

Banking and public sector companies pose as one of the safest forms of investment, as they are government-backed companies functioning in one of the major sectors of the country. As of 2019, the total assets under management maintained by such mutual funds stood at Rs. 58,345 crores (on 31st October 2019). Returns generated by most banking and PSU debt funds stood at an average of 10.81% on the total principal amount invested.


The benefits of investing in a PSU and banking debt fund can be listed as –

  1. Low risks as the portfolio managers primarily procure debt securities for respective mutual funds.
  2. Have relatively high credit ratings as determined by the top rating agencies.
  3. PSU Banking sectors are backed by the Government of India, and hence, the investment enjoys superlative security.

Risks Associated 

The best banking and PSU debt funds comprise debt tools of public sector companies and top-performing banking organisations. Hence, the risks associated with such investment are minimal, as the corpus amount is secured by central government backing. Also, debt funds by nature have lesser risk.


As the best banking and PSU debt fund primarily invests in debt securities of large-cap companies, the probability of realising substantial market gains is less. Individuals should keep in mind the following restrictions before choosing to pool their money in such mutual funds –

  • High NAV – These mutual funds are highly demanded in the market, owing to its minimal risks factors. Individuals investing in these funds might have a lower aptitude for risk or might aim to dilute the overall risk factor on their entire investment stock through debt securities.

As a result, the cost of investing might be substantial, which might impose a financial burden on investors.

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  • Low returns – Debt securities generate lower profits than equity investments. Also, as the investment portfolio of a PSU and banking debt fund comprises debt securities chiefly issued by large-cap companies, chances of a considerable increase in stock prices are negligible. Thus, profits realised, though assured, might not be substantial.
  • Short investment tenure – Such banking and PSU funds have a short holding period, ranging from 1 – 3 years. Thus, it is not an ideal instrument for individuals looking for secure long term investment options.

Tax Benefits 

Individuals realising capital gains upon resale of NAV units of banking and PSU funds after three years are taxed as LTCG (long term capital gains). After adjustment for indexation, and LTCG tax rate at 20% is imposed on total profits realised.

Who Should Invest in Banking and PSU Fund?

Centralised scheduled banks and public sector undertakings are backed by the government, and hence, have nominal risk associated. Also, this type of mutual funds primarily focuses on debt instruments issued by such companies. Debt securities generally have a lower risk factor than equities as they act as a liability on the issuing organisation. Companies have to pay interest to debenture holders before distributing profits among equity shareholders.

Risk-averse investors looking for a secure investment option can opt for a banking and PSU debt fund. Individuals opting for the dividend pay-out option can realise gains through timely yields, while growth option allows investors to enjoy capital gains through increased NAV value on resale.

Investors who are habituated with the workings of the stock market and often pool their money in risky assets can choose to allocate a part of the portfolio to the best banking and PSU debt fund, as it mitigates the risk factor considerably. In times of unforeseen downtrend of the stock market, money deposited in such debt mutual funds can provide considerable returns to compensate for lower returns from the risky assets.

Thus, the primary objective behind investment in a banking and PSU debt fund is the preservation of corpus. However, the rate of return on investment (ROI) may be lower than ROI realised through equity tools.

Nonetheless, such debt mutual funds are ideal for investors looking to park surplus funds with a relatively secure investment scheme, so that the entire portfolio amount is preserved, along with corresponding returns.

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