PSU Bonds

PSU bonds in India

Bonds issued by PSUs (Public Sector Undertakings) are popularly referred to as PSU Bonds. PSUs are government owned institutions that work in the interest of the nation.

Can PSU issue bonds in India?

Yes, government backed PSU (Public Sector Undertakings) issue Bonds. PSUs may issue bonds to fund projects, improve capitalisation (in case of banks) or just for working capital.

Are PSU bonds as safe as government bonds?

PSU bonds can be considered almost as safe as Government Bonds but not at the same level. We say this because even state government guaranteed PSUs have defaulted on their debt in the past. Further, not all PSUs are rated AAA (the highest rating) which shows absence of top notch financial health.

PSU bonds interest rates

PSU bonds have varying interest rates depending on the bond tenure and credit rating. AAA-rated long-term PSU bonds have an interest rate of around ~8% while lower rated PSU bonds have interest rates as high as 11-12%.

Are all PSU bonds guaranteed by the government?

Only some PSU bonds are guaranteed by governments. However, there is an implicit government guarantee applicable on all PSU bonds because of government ownership and support of the PSU.

Are PSU bonds a type of corporate bonds?

Yes, PSU bonds are a type of corporate bond. Corporate bonds are all bonds issued by non government entities: PSU and private companies likewise.

PSU Bonds vs Bonds issued by Private Sector Companies

Generally, PSU Bonds are safer than Private Sector Issued Bonds. However, this is true only if all other factors are identical or similar - credit rating, yield, interest rate, maturity date etc.

Simply put, a AAA private sector bond is likely to be safer than a BBB rated PSU bond. But a AAA rated PSU bond can almost certainly be considered to be safer than a AAA rated private sector bond.

Who should invest in PSU bonds?

PSU bonds are considered to be safer than bonds issued by private sector companies. This makes PSU bonds safest among the corporate bond universe. Low risk investors should consider PSU bonds for their better than FD return and tax treatment (if held for more than 3 years)

Risks of investing in PSU bonds

PSU bonds are amongst the safest in the bonds universe. Yet, they are exposed to the same risks that other bonds are exposed to. These are interest rate risk, liquidity risk and credit default risk. Among this, credit default risk is quite low for PSU bonds. Interest rate risk and liquidity risk can be eliminated by holding the PSU bond until maturity.

Advantages of investing in PSU bonds

The biggest advantage of investing in PSU bonds is the highest safety that they have. PSU bonds are safer than corporate bonds and almost as safe as government bonds. Investing in PSU bonds is a good idea if you are looking for principal protection and regular interest income.

How to identify the best PSU bonds?

The best PSU bonds for you may be different from the best PSU bonds for someone else. Here’s how you can identify the best NBFC bonds.

Credit rating: Are you a low risk investor or a moderate risk investor? A low risk investor should invest only in AAA rated PSU bonds. A moderate risk investor can consider a lower rated PSU bond.

Yield: You want the yield to be high. Because yield is inversely related to the credit rating, it is important to strike a balance between the two depending on your risk taking ability.

Maturity date: It is a good idea to align your investment time frame with the balance maturity of the PSU bond. This way you increase your likelihood of holding the bond until maturity. Holding the bond until maturity eliminates interest rate and liquidity risks.

Government guarantee: A government guaranteed PSU bond is extremely safe. Governments rarely default and this feature is shared by government guaranteed PSU bonds.

By filtering in the above manner, you can find a list of the best PSU bonds for your portfolio.