Are PSU Funds A Good Investment Option?

6 mins read
by Angel One

PSU equity funds allow investors to invest in government-owned public sector companies and bank stocks. It is an attractive option for risk-averse investors since these are almost risk-free. But, before selecting PSU mutual funds, you must decide if they fit your overall financial goals.

What are PSU funds?

SEBI introduced these funds a few years back.

PSU funds are open-ended debt funds, predominantly investing in public sector undertakings, banks, and public financial institutions classified by SEBI. Earlier, the fund type was called short-term or income funds.

Here are the salient features of PSU mutual funds.

  • As their name suggests, these funds invest around 80% of their corpus in various PSU companies, banks, and public financial institutions.
  • It predominantly invests in different bonds, debentures, and certificates of deposits.
  • These suit low-risk investors and earn higher returns than traditional investment schemes.
  • Banking and PSU funds invest primarily in AAA- or equivalent debt instruments from quasi-government status borrowers.
  • Their semi-sovereign status ensures repayment. These have the risk feature of ultra-short terms funds and return potential of income funds.
  • Seasoned investors looking for a steady credit profile and less volatility prefer to invest in PSU funds.
  • Besides these funds, investors also can invest in PSU equity mutual funds, which invest in PSU company stocks listed in the bourses. These are a type of open-ended equity funds.

 Who can invest?

Because of their low-risk feature, PSU mutual funds appeal to a wide range of investors.

  • Being a type of debt funds, these are not highly volatile and generate steady returns for conservative investors.
  • Investors looking for better returns than bank deposits prefer to invest in these funds for their secured nature.
  • Investors wanting to invest in debentures invest in high quality and liquid PSU funds.
  • These funds are ideal for investors looking to park their investable corpus for a short duration as PSU funds have 1-2 years of maturity.

PSU equity mutual funds

As their name suggests, PSU equity mutual funds invest in public sector company stocks listed in the exchanges. These are open-ended equity funds and invest in government-owned companies.

Since the introduction of economic liberalisation, the government has divested several PSU companies and listed them in the bourses. Investors can buy these company stocks from the exchanges.

Should you invest in PSU equity mutual funds?

We suggest that you make any investment after researching the market. The PSU sectors couldn’t perform lately mainly because these aren’t as efficient as the private sector companies. Several private sector companies have eaten into the market shares of PSU and banking companies or given tough competition. Because of their lacklustre performance, many investors will avoid investing in PSU equity funds. However, few organisations, primarily from the ‘Maharatna’ and ‘Miniratna’ categories, have performed better and earned good returns on investment.

If you want to invest in PSU equity mutual funds, we suggest selecting multi-cap funds that offer you exposure across different industry categories.

Advantages of PSU mutual funds

High liquidity

Bank and PSU funds are highly liquid. These funds invest in top-rated debt instruments from PSU companies, NABARD, and SIDBI with short term maturity of 1 to 2 years, providing short term investment options with high liquidity.

These generate stable but higher returns when the interest rates fall.

Low risk

Banking and PSU funds carry a low risk of market volatility and hence, are highly sought after by investors for short and medium-term investment. However, it is not entirely risk-free like other debt funds such as Dynamic Bond Funds or Credit Risk Funds.

Better returns

These funds generate slightly more returns than bank deposits. Investors who want stable returns and are ready to take moderate risk than FDs invest in PSU funds. Moreover, these funds are available for shorter tenure than fixed deposits. These are considered safe havens amid the debt crisis for better price discovery.

Risks of PSU funds

Although these funds are low risk, they aren’t entirely risk-free, especially susceptible to interest rate movement and may earn negative returns when yields go up.

Secondly, all bonds and debentures are traded in the exchanges, making these prone to mark-to-market losses. But in a time frame of three months, these funds have always generated positive returns. But investors need to acknowledge that these funds are comparatively new inclusions. Hence, enough track record is not available to judge long term performance.

Things to consider before investing

Since mutual fund investment is a critical financial decision, you should invest enough time researching to select the best option. It includes understanding the risks involved, fund performance, and business proficiency of the holding.

Here are some of the factors that investors should consider before investing.

  • Financial goal: Mutual fund investment should align with the investor’s overall financial plan for the best results. It is critical to evaluate the fund’s objective and align it with your financial goals before investing.
  • Fund performance: Analyzing fund performance in different market conditions will help you choose a reliable fund. Though past performance is no guarantee of future performance, a rule of thumb is to choose a fund that has performed consistently in bullish and bearish markets.
  • Fund house and management: Asset management companies and fund managers play a decisive role in selecting stocks, allocation, and management. If the fund manager is experienced, the fund will perform better and deliver good returns.
  • Expenses and fees: Mutual fund investing involves costs, and it can impact the ultimate returns from your investment. Before selecting a fund for investment, review the costs you will have to bear regarding expense ratio, entry load, and exit load.
  • Other factors: There are a few additional factors like the NAV value of the units, asset under management, investible corpus, and tenure that investors need to consider before selecting a reliable PSU mutual fund.

Taxation and PSU funds

Banking and PSU funds are taxed as per debt fund tax norms. If profits are held for more than three years, it is considered for long-term capital gain, and a 20% tax rate applies with indexation benefits. For an investment tenure of fewer than three years, short term capital gain tax would apply. The profit will be added to the investor’s income and taxed per income tax slabs.

Indexation benefit in long term capital gain tax helps lower the overall impact of the long term gain. Here is an example of how indexation works.

Indexed cost of acquisition: Investment amount * (CII of the years of withdrawal/CII of the year of investment)

CII is the government’s Cost Inflation Index.

Let’s say you invested Rs 65000 in the year 2016 and withdrew Rs 100000 in 2018. The value of capital gain before indexation is Rs 35000.

Now, indexed cost of acquisition: Rs 65000* (280/254)= 71,653

Final capital gain= Rs (100000-71,653) = Rs 28,346

Long term capital gain at 20% = 28,346*20%= Rs 5,669

Key takeaways

  • PSU funds invest the corpus in banks, PSU, and public financial institutions categorised by SEBI.
  • These funds invest in different debt instruments like bonds, certificates of deposits, debentures.
  • PSU funds are highly liquid short term investment options with a tenure of 1-2 years.
  • These cater to a wide range of investors, including low-risk investors and investors with exposure to equity looking for investment in debt funds for portfolio diversification.
  • PSU funds create stable secondary income for investors.
  • Capital gain from PSU funds is subject to capital gain tax depending on the tenure of investment.
  • Profits held for more than three years are subject to long term capital gain tax at the rate of 20% with indexation benefits.

Concluding thoughts

PSU funds are relatively new types of mutual funds introduced by the SEBI. These funds are typically debt funds offering higher returns than traditional investment in shorter tenure, allowing investors to park their investable corpus quickly.

Now that you have learned about PSU funds, find out if it fits your overall financial goal to select a reliable investment fund.

 

FAQs

What are PSU funds?

PSU funds invest in PSU companies, banks and financial institutions recognised by SEBI. These are primarily debt funds and are considered risk-free because of the quasi-government status of the borrowers.

How long should I invest in PSU funds?

PSU funds are debt funds that are good for short term investment.

If you are investing in thematic PSU equity funds, then you should invest for at least five years because these are equity funds and need time to perform. Please bear in mind that thematic PSU funds are one of the riskiest mutual funds because their performance depends on the theme playing out as expected.

How can I invest in PSU funds from Angel One?

Angel One allows you to invest in a wide range of investment products from an integrated platform. Open Angel One account and select PSU mutual funds for investing.