Best Banking and PSU Funds Sorted by Last 3 Year Returns

Fund Name
AUM
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3Y Returns
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Ratings
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UTI Banking and PSU Fund Direct Plan Quarterly IDCW Reinvestment

UTI Banking and PSU Fund Direct Plan Quarterly IDCW Reinvestment

Debt Banking and PSU Fund

₹839.11 Cr.

7.82%

4

UTI Banking and PSU Fund Direct Plan Quarterly IDCW Payout

UTI Banking and PSU Fund Direct Plan Quarterly IDCW Payout

Debt Banking and PSU Fund

₹839.11 Cr.

7.82%

4

UTI Banking and PSU Fund

UTI Banking and PSU Fund

Debt Banking and PSU Fund

₹839.11 Cr.

7.82%

4

UTI Banking and PSU Fund Direct Plan Flexi IDCW Payout

UTI Banking and PSU Fund Direct Plan Flexi IDCW Payout

Debt Banking and PSU Fund

₹839.11 Cr.

7.82%

4

UTI Banking and PSU Fund Direct Plan Flexi IDCW Reinvestment

UTI Banking and PSU Fund Direct Plan Flexi IDCW Reinvestment

Debt Banking and PSU Fund

₹839.11 Cr.

7.82%

4

UTI Banking and PSU Fund Direct Plan Annual IDCW Payout

UTI Banking and PSU Fund Direct Plan Annual IDCW Payout

Debt Banking and PSU Fund

₹839.11 Cr.

7.82%

4

UTI Banking and PSU Fund Direct Plan Annual IDCW Reinvestment

UTI Banking and PSU Fund Direct Plan Annual IDCW Reinvestment

Debt Banking and PSU Fund

₹839.11 Cr.

7.82%

4

UTI Banking and PSU Fund Direct Plan Half Yearly IDCW Payout

UTI Banking and PSU Fund Direct Plan Half Yearly IDCW Payout

Debt Banking and PSU Fund

₹839.11 Cr.

7.82%

4

UTI Banking and PSU Fund Direct Plan Half Yearly IDCW Reinvestment

UTI Banking and PSU Fund Direct Plan Half Yearly IDCW Reinvestment

Debt Banking and PSU Fund

₹839.11 Cr.

7.82%

4

UTI Banking and PSU Fund Regular Plan Monthly IDCW Payout

UTI Banking and PSU Fund Regular Plan Monthly IDCW Payout

Debt Banking and PSU Fund

₹839.11 Cr.

7.37%

4

UTI Banking and PSU Fund Regular Plan Monthly IDCW Reinvestment

UTI Banking and PSU Fund Regular Plan Monthly IDCW Reinvestment

Debt Banking and PSU Fund

₹839.11 Cr.

7.37%

4

ICICI Prudential Banking and PSU Debt Fund

ICICI Prudential Banking and PSU Debt Fund

Debt Banking and PSU Fund

₹9,017.64 Cr.

6.52%

5

ICICI Prudential Banking and PSU Debt Fund Direct Plan Quarterly IDCW Payout

ICICI Prudential Banking and PSU Debt Fund Direct Plan Quarterly IDCW Payout

Debt Banking and PSU Fund

₹9,017.64 Cr.

6.33%

5

ICICI Prudential Banking and PSU Debt Fund Direct Plan Quarterly IDCW Reinvestment

ICICI Prudential Banking and PSU Debt Fund Direct Plan Quarterly IDCW Reinvestment

Debt Banking and PSU Fund

₹9,017.64 Cr.

6.33%

5

Kotak Banking and PSU Debt

Kotak Banking and PSU Debt

Debt Banking and PSU Fund

₹5,734.18 Cr.

6.12%

5

ITI Banking and PSU Debt Fund

ITI Banking and PSU Debt Fund

Debt Banking and PSU Fund

₹30.24 Cr.

6.07%

0

ITI Banking and PSU Debt Fund Direct Plan IDCW Payout

ITI Banking and PSU Debt Fund Direct Plan IDCW Payout

Debt Banking and PSU Fund

₹30.24 Cr.

6.07%

0

ITI Banking and PSU Debt Fund Direct Plan IDCW Reinvestment

ITI Banking and PSU Debt Fund Direct Plan IDCW Reinvestment

Debt Banking and PSU Fund

₹30.24 Cr.

6.07%

0

Bandhan Banking and PSU Debt Fund Direct Annual IDCW Payout

Bandhan Banking and PSU Debt Fund Direct Annual IDCW Payout

Debt Banking and PSU Fund

₹14,109.10 Cr.

5.92%

0

Bandhan Banking and PSU Debt Fund Direct Daily IDCW Reinvestment

Bandhan Banking and PSU Debt Fund Direct Daily IDCW Reinvestment

Debt Banking and PSU Fund

₹14,109.10 Cr.

5.9%

2.5

Aditya Birla Sun Life Banking and PSU Debt Fund

Aditya Birla Sun Life Banking and PSU Debt Fund

Debt Banking and PSU Fund

₹9,396.96 Cr.

5.89%

4.5

Aditya Birla Sun Life Banking and PSU Debt Fund Direct Quarterly IDCW Payout

Aditya Birla Sun Life Banking and PSU Debt Fund Direct Quarterly IDCW Payout

Debt Banking and PSU Fund

₹9,396.96 Cr.

5.88%

4.5

Aditya Birla Sun Life Banking and PSU Debt Fund Direct IDCW Payout

Aditya Birla Sun Life Banking and PSU Debt Fund Direct IDCW Payout

Debt Banking and PSU Fund

₹9,396.96 Cr.

5.88%

4.5

HDFC Banking and PSU Debt Fund

HDFC Banking and PSU Debt Fund

Debt Banking and PSU Fund

₹6,013.13 Cr.

5.85%

2.5

Nippon India Banking & PSU Debt FundBonus

Nippon India Banking & PSU Debt FundBonus

Debt Banking and PSU Fund

₹5,477.18 Cr.

5.84%

2.5

Nippon India Banking & PSU Debt Fund

Nippon India Banking & PSU Debt Fund

Debt Banking and PSU Fund

₹5,477.18 Cr.

5.84%

2.5

Nippon India Banking and PSU Debt Fund Direct Plan IDCW Payout

Nippon India Banking and PSU Debt Fund Direct Plan IDCW Payout

Debt Banking and PSU Fund

₹5,477.18 Cr.

5.84%

2.5

Nippon India Banking and PSU Debt Fund Direct Plan IDCW Reinvestment

Nippon India Banking and PSU Debt Fund Direct Plan IDCW Reinvestment

Debt Banking and PSU Fund

₹5,477.18 Cr.

5.84%

2.5

Edelweiss Banking and PSU Debt Fund

Edelweiss Banking and PSU Debt Fund

Debt Banking and PSU Fund

₹274.97 Cr.

5.82%

3

Edelweiss Banking and PSU Debt Fund Direct Plan IDCW Payout

Edelweiss Banking and PSU Debt Fund Direct Plan IDCW Payout

Debt Banking and PSU Fund

₹274.97 Cr.

5.82%

3

About Banking and PSU Mutual Funds

Banking and PSU funds invest 80% of the fund’s capital in debt instruments of Banking and PSU companies. The primary targets are banking and other PSU companies, which are usually large-cap companies with AAA- ratings from top credit rating agencies. The fund managers pick up Maharatna and Navratna companies’ stocks to add stability to the fund. 

Banking and PSU funds are debt funds, allowing diversification across Bonds, debentures, and certificates of deposits.  

In 2017, SEBI amended the constituents of Banking and PSU funds to include debt securities issued by municipal bodies in the fund’s portfolio.

How do Banking and PSU Funds Work?

Banking and PSU Funds are a type of debt mutual fund investments. They typically allocate around 80% of their total assets to bonds, debentures, and certificates of deposits. These funds focus on debt securities with high liquidity and relatively short maturity periods. 

The primary targets for these investments are public sector banks, which operate under the government’s supervision. Consequently, these funds are considered safer compared to investments in private sector entities.

Banking and PSU Funds are suitable for investors looking for short to medium-term or ultra-short-term investment options. While they carry lower risks compared to some other debt funds, they are not entirely risk-free. The returns on these funds are influenced by market volatility. 

Therefore, investors with a lower risk tolerance may find these funds appealing, but it’s crucial to consider their financial goals and the prevailing market conditions before making an investment decision.

Features of Banking and PSU Funds

Banking and PSU funds are a type of open-ended debt funds that invest primarily in debt securities issued by banks, PSU, and public financial institutions. According to the SEBI mandate, Banking and PSU funds invest 80% of the capital pool into large-cap banking and PSU companies. As a result, these funds have superior credit quality than other debt funds. 

 Key features of the fund that you should know are the following. 

  1. These funds lend only to Banking and PSU companies. High-quality borrowers mean the risk of default is considerably less. The average credit rating of these funds is AAA-. 
  2.  Around 80% of the fund’s assets get invested in banking and PSU companies to generate low-risk returns. The remaining 20% is spread across high-quality housing finance companies (HFCs) and high-quality NBFCs.
  3. These funds generate low-risk returns. The credit risk is low due to investment in high-quality credit rating instruments. However, these funds are exposed to interest rate risks if the interest rate goes up. However, one can manage interest rate risk by adjusting investment duration. Investment is suitable for 3 years or shorter. 

Advantages of Investing in Banking and PSU Funds

The advantages of investing in Banking and PSU mutual funds are multifold –

  1. High liquidity: SEBI requires at least 10% of the fund to invest in T-bills and G-secs that help maintain liquidity. These funds invest in AAA- credit rating instruments, which are in high demand.  
  2. Lower risks: Banking and PSU funds are safe investments. The funds invest in high credit-rating banks and PSU company debt securities, making them less risky than other debt funds. Investments in these funds are short-term, and the return from the fund isn’t impacted by market volatility. 
  3. Higher returns: The returns are higher than the bank’s FD without taking higher risks.
  4. Tax savings: An investment tenure of 3 years can help your capital gain tax obligations significantly. Investors can lower their tax burden using indexation benefits when the investment tenure is more than 36 months. 

Risk Involved in Banking and PSU Funds

Although safer than other debt and equity funds, Banking and PSU funds aren’t totally risk-free. These funds are exposed to credit, interest rate, and liquidity risks. The risks involved in  Banking and PSU funds are below. 

  1. Interest rate risk – This is the risk that arises from an adverse change in the interest rates in the market. For example, if the fund holds fixed-rate bonds and the market interest rates increase, then the bonds held by the fund will lose in value, causing a fall in the value of the fund’s holdings in general. The NAV would fall, and the investor would lose money.      
  2. Limited profitability: Debt securities generate low-risk but moderate returns compared to equity investments.     
  3. Short tenure: Banking and PSU funds usually have short holding periods of 1-3 years. Therefore, they may not be the right option for investors looking for long-term investments. 

Equity fund investors mitigate risks by diversifying their mutual fund portfolio with Banking and PSU funds. These funds have better-managed risks than several other debt funds. Around 10% of the fund is invested in G-sec and T-bills to counterbalance liquidity risk.

Factors To Consider Before Investing in Banking and PSU Funds

  1. Risk Profile: Assess your risk tolerance before investing. Banking and PSU (Public Sector Undertakings) funds are relatively low-risk options, suitable for conservative investors seeking stable returns.
  2. Portfolio Composition: Review the fund’s holdings to ensure it aligns with your investment objectives. These funds primarily invest in bonds issued by banks and PSUs. A well-diversified portfolio can enhance stability.
  3. Expense Ratio: Lower expense ratios imply reduced overhead costs, which can lead to higher returns. Choose funds with competitive expense ratios to maximise your gains.
  4. Performance History: Analyse the fund’s historical performance to gauge its consistency and ability to generate returns over time. Look for funds that have outperformed their benchmark indices.
  5. Exit Load and Tax Implications: Understand the exit load and tax implications associated with these funds. Longer holding periods may offer tax benefits, while exit loads can impact your liquidity.

Who Should Invest in Banking and PSU Funds?

The market risk of these funds is nominal. Banking and PSU funds invest in debt securities issued by scheduled banks and public sector companies backed by the government. 

  1. Therefore, conservative and low-risk appetite investors can benefit by investing in the Banking and PSU funds. Investors can realise regular income through timely yields while enjoying capital appreciation from increased NAV value.  
  2.  Investors who want to park surplus money for 2-3 years in schemes that will give higher returns can explore these funds. These funds are safer investment options for the short term

Taxability of Banking and PSU funds

If the investment period is less than 36 months, a short-term capital gain tax will apply to the total realised profit at the same rate as the taxpayer’s income tax slab rate. 

If the units are realised after 3 years, the same comes under long-term capital gain. A 20% LTCG will apply to that capital gain with the benefit of indexation. Investors can capitalise on higher returns with tax savings by investing in Banking and PSU funds for 3 years.  

The dividends received are added to the taxable income and are taxed as per the income bracket of the investor. In addition to this, there is a 10% TDS on dividend amounts exceeding Rs. 5000 in a financial year.

How to Invest in Banking and PSU Funds?

Investing in Banking and PSU Funds is a straightforward process through your Angel One account. Here are the steps:

Step 1: Access your Angel One account by using your registered mobile number. Verify the OTP and enter your MPIN.

Note: If you don’t have a Demat account with Angel One, you can easily open one by completing the KYC procedure and submitting the required documents.

Step 2: Choose the most suitable fund based on your financial goals and risk tolerance. You can assess various funds in the mutual fund section on the Angel One app. During this stage, consider the following factors:

  • Identify the fund you want to invest in or take recommendations from Angel One across different categories.
  • Evaluate the fund’s historical performance, tax implications, constituent sectors, and stock holdings.
  • Use the provided calculator to estimate potential returns.
  • Assess the fund’s risk level and compare it with your risk tolerance.
  • Review the fund’s ratings from reputable rating agencies (typically rated from 1 to 5).
  • Consider the fund’s expense ratio to understand the associated costs.

Step 3: After finalising the fund(s) you want to invest in, navigate to the Mutual Funds section within your Angel One account and locate the chosen fund. Since this may be a long-term investment, exercise caution in your selection. During this stage, take the following steps:

  • Decide whether you want to invest a lump sum amount or opt for a monthly SIP (Systematic Investment Plan).
  • Specify the investment amount and choose your preferred payment method. UPI is the recommended mode, but you can also use net banking.
  • For SIP investments, you can set up a mandate for hassle-free future instalments.

Top 5 Banking and PSU Mutual Funds

Name of the fund Assets Under Management (in ₹crore) Minimum investment (in ₹) 3-Yr CAGR (%) 5-Yr CAGR (%)
Kotak Banking and PSU Debt Fund 5,265 5000 7.00 7.48
Nippon India Banking and PSU Debt Fund 4,008 5000 7.18 7.42
HDFC Banking and PSU Debt Fund 4,836 100 6.99 7.18
ICICI Prudential Banking and PSU Debt Fund 7,231 500 7.17 7.16
UTI Banking and PSU Debt Fund 524 500 8.09 5.59

The above-mentioned top funds are for informational purposes only and are not recommendations. The funds are based on a 5-yr CAGR, which is subject to change frequently. Check out real-time data on Angel One.

Kotak Banking and PSU Debt Fund

The fund has delivered consistent returns in line with the other funds in the category and CRISIL Banking and PSU Debt benchmark. Introduced in January 2013, the fund has earned 8.2% returns on an annualised basis.

Both lump sum and SIP investments are allowed.

HDFC Banking and PSU Debt Fund

The fund has earned an average return of 7.98% since it was introduced 9 years ago. The midsize fund has an expense ratio of 0.39%. A lower expense ratio implied better returns over a long investment horizon.

Nippon India Banking and PSU Debt Fund

The fund earned an average return of 7.71% at inception. The expense ratio of the fund is 0.39%, which is lower than the category average of 0.48%. Also, the Yield to Maturity of the fund is 7.79 against the category average YTM of 7.71%.

ICICI Prudential Banking and PSU Debt Fund

The fund’s high credit profile indicates that the fund lends to top-quality borrowers. Investors earned an annualised return of 8.19% by investing in the funds when it was introduced in January 2013.

The fund’s expense ratio is 0.33%, less than the category average of 0.48%. A yield to maturity of 7.80% is higher than the category rate of 7.71%.

UTI Banking and PSU Debt Fund

Investors can invest in UTI Banking and PSU Debt funds to take advantage of high-quality debt fund returns. The fund offers very good downside protection by lending to high-quality borrowers.

Introduced in February 2014, it has grown at a CAGR of 7.07%. The fund’s expense ratio of 0.25% is significantly lower than the category average.

Mutual Funds Calculators

Banking and PSU Funds FAQs

Are Banking and PSU funds high-risk?

Banking and PSU funds are low-risk funds that would appeal to conservative investors. These funds allocate 80% of the corpus to banks and PSU bonds and CDs. Hence, the credit risk of these funds is close to near zero as the chances of default are none. However, returns on these funds can be impacted by changing interest rates.

Should I invest in Large Cap Mutual Funds?

Consider investing in these funds if you have surplus money, which you want to invest in a low-risk investment channel for a short period of 2-3 years. Because of assured return, these funds are always high in demand, which keeps the NAV high.

What are the expected returns of Banking and PSU funds?

Most Banking and PSU funds have earned an average return of 10.85% historically. It is important to note that the returns on these funds are lower than equity funds. But they have generated better returns than bank savings account rates in the short term.

What are the risks involved in investing in Banking and PSU funds?

As debt funds, Banking and PSU funds are exposed to credit, interest rate, and liquidity risks. Bear in mind that these are some of the safest investment options. The fund lends to Banking and Maharatna and Navratna companies with AAA- ratings.

Are Banking and PSU funds taxable?

The tax treatment of Banking and PSU funds is the same as the other debt funds, which is, Short-term capital gain arising when investment is of less than 36 months gets added to your income and taxed according to your income tax slab rate. Long-term capital gain when the investment period is >36 months is taxed at a 20% rate after indexation.

How much money should I invest in Banking and PSU funds?

These funds offer moderate returns, much less than equity investment. It makes sense to only invest a portion of your investable corpus in Banking and PSU funds to meet short-term financial goals.