What Are Banking And PSU Mutual Funds?

Banking and PSU Funds are open-ended mutual funds that invest at least 80% of their assets in debt instruments issued by public financial institutions, banks, and PSUs (public sector undertakings).

Ever since the evolution of the Banking and Public Sector Undertakings in India, any related schemes have gained people’s trust and confidence in investment returns as the government backs them. Most investments in this category strive to maintain an equal balance of yield, safety, and liquidity. By combining accruals and active duration management, their technique aims to reduce credit risk while generating returns. Some famous examples of this category are SBI Mutual Fund, Canara Bank Mutual Fund, Life Insurance Corporation, Indian Oil Corporation Ltd, Bharath Electronics Ltd, etc. 

Banking Sector in India

The Banking Regulation Act of 1949 permits the Reserve Bank of India to supervise commercial banks. The Government of India directly controls Commercial banks and Nationalized banks. 

PSU Sector in India

Public Sector Undertakings (PSUs) are Government- owned establishments owned by the Government of India or State Governments of India.

What are Banking and PSU Mutual Funds?

Banking and PSU Funds are types of debt mutual fund schemes. Predominantly, these schemes invest in bonds, debentures, and certificates of deposits issued by banks, PSUs (PSU), and Public Financial Institutions (PFI). 

Features of Banking & PSU Mutual Funds Sector

Below mentioned are some of the general features of this sector.

  1. At least 80% of the capital is invested in debt obligations held by banks, public sector organizations, and public financial institutions
  2. Mostly invested in government-run public sector banks as there is an assurance of payback for the money
  3. Often they invest in debt instruments with a low average maturity and strong liquidity
  4. Compared to conventional debt funds, these funds are investments with ultra-short or short to medium-term time horizons and lower risk

Advantages of Banking and PSU Mutual Funds Sector

Take a look at a few of the advantages of investing in this sector. 

  1. Better returns

The risk inherited with these types of funds is comparatively less as the majority of the amount is invested in government-backed organizations.

  1. More secured

They typically make investments in AAA-rated or comparable categories, which claim excellent credit ratings and have almost sovereign status as lenders, making them more secure. 

  1. High liquidity

They have high liquidity since they concentrate on investing in highly esteemed sectors. These are stable-return short-term investment strategies. Thus, offering greater liquidity in times of need. 

  1. Taxation

As per the Income Tax Act, if you have held debt investments for more than three years, you will have to pay tax on long-term capital gains. These investments are subject to the 20% indexation-advantaged LTCG tax 

Limitations of Banking and PSU Mutual Funds Sector

Although Banking and PSU schemes are considered to be less risky, there await a few limitations as follows:

l As many reputed banks are being merged and acquired, conservative investors avoid participating in debt schemes.

l The rising interest rate environment is having adverse impacts on debt funds. Moreover, as the interest rate gradually increases, there is a risk of volatility. 

Why should you invest in the Banking & PSU Mutual Funds Sector?

Compared to conventional debt schemes, short-term investments in Banking and PSU Funds Sector are considered safer. Below are a few of the reasons as to why investing in this sector would be beneficial for you.  

l If you seek consistent returns 

If you are seeking a stable credit profile with minimal volatility, investments in these funds are an apt choice.

l If you are a conservative investor

This is your best option compared to other types of funds if you have a low-risk tolerance and expect better returns.

l If you wish to diversify your portfolio

These debt mutual funds are the perfect alternative to stocks if you are wishing to invest your hard-earned money in a reliable plan that will safeguard your portfolio while generating gains with considerable risk.


For investors looking to park surplus money with a comparatively solid investing strategy so that the entire portfolio amount is retained, along with proportional returns, then Banking and PSU Mutual Funds are suitable. However, every investment demands thorough investigation and evaluation of variables such as the risks involved, the past performance of the returns, fund house management, financial goal, and cost. 


  1. This blog is exclusively for educational purposes
  2. Investments in the securities market are subject to market risks, read all the related documents carefully before investing