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Banking & PSU Funds

Banking & PSU funds allocate 80% of their assets to debt instruments issued by banks, public sector undertakings, and public financial institutions.

time horizon

2 to 3 years+

total funds

24 Funds

total aum

₹80,755 Cr Total AUM

Debt

Explore Banking & PSU Mutual Funds

Fund nameFund sizeExpense Ratio
3Y Returns
UTI Banking & PSU Debt Fund Direct Growth₹947 Cr0.25%7.5%
ICICI Prudential Banking and PSU Debt Fund Direct Growth₹9,056 Cr0.39%6.3%
Kotak Banking & PSU Debt Direct Growth
Kotak Banking & PSU Debt Direct Growth

Banking & PSU Low to Moderate Risk

₹5,951 Cr0.39%5.9%
ITI Banking & PSU Debt Fund Direct Growth₹30 Cr0.15%5.9%
Aditya BSL Banking & PSU Debt Fund Direct Growth₹10,088 Cr0.38%5.7%
HDFC Banking and PSU Debt Fund Direct Growth₹6,205 Cr0.39%5.7%
Nippon India Banking & PSU Debt Fund Direct Growth₹5,451 Cr0.38%5.6%
Edelweiss Banking and PSU Debt Fund Direct Growth₹284 Cr0.39%5.5%
Tata Banking & PSU Debt Fund Direct Growth₹213 Cr0.26%5.5%
Franklin India Banking & PSU Debt Fund Direct Growth₹630 Cr0.19%5.4%

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All about Banking & PSU Funds

What are Banking and PSU Debt Funds?

Banking and PSU Debt funds are debt funds that invest in debt securities of banks, Public Sector Undertakings (PSU), public financial institutions and municipal bonds.

PSUs are government owned enterprises where the share of government ownership is 51%+.

Banking and PSU Debt funds are ideal if you are looking for a combination of:

  • Liquidity
  • Low Risk Investment
  • Fair Returns*

*The returns of banking and PSU debt funds are typically higher than those of a bank savings account and fixed deposit (FD).

Additionally, these funds are ideal for short investment horizons, like a few months to a couple of years. 

If you have a shorter investment horizon, other debt fund categories like overnight and liquid funds can be considered to keep risks in check. On the other hand, for longer investment horizons, other aggressive debt, hybrid and equity funds with higher return potential can be considered.

Banking and PSU debt funds invest at least 80% of the corpus in debt securities of banks, public sector undertakings, and public financial institutions. These funds invest in bonds and debentures of high credit quality or AAA-rated category. The primary focus is on credit quality with short to medium-term maturities.

Benefits of Banking and PSU Debt Funds

Safety and Stability

Banking and PSU debt funds are ‘relatively’ safe because they invest majorly in bonds and papers of banks and public sector companies. Since most entities are government-backed, they don’t have minimum credit risk.

Banking and PSU debt funds invest in short-term securities. Thus, they substantially reduce the ‘interest rate risk’ associated with investing in debt instruments.

The average credit quality of all Banking and PSU Debt funds is AAA. This means that the banking and PSU debt funds invest in securities with the highest credit quality, which reduces ‘credit risk’, the other major risk of investing in debt instruments.

Source: Valueresearch | As of Jan, 2024

Because of the low interest rate and credit default risks, Banking and PSU Debt funds offer safety and stability of returns.

Higher Return

Banking and PSU debt funds invest in short-term securities with high credit quality. These schemes offer better returns than fixed deposits. Also, they do not have a lock-in period like FDs and, thus, are highly liquid.

Who Should Invest in Banking and PSU Debt Funds?

Banking and PSU debt funds are ideal for short-term investments (a year to a couple of years) because of their liquidity, stability of return and principal protection features.

Here are a few situations we feel banking and PSU debt funds may fit well in:

Fixed Deposit Alternatives

Typically, fixed deposits are booked for a few months to a couple of years. When in need of money, you may have to break the FD prematurely. While, banking and PSU debt funds do not have any lock-in period and are ideal for short-term investments.

Since these funds invest in high quality debt instruments of banks and PSUs, they have the potential to deliver better returns than fixed deposits and are taxed only upon redemption.

Fixed deposits of up to Rs. 5 lakh per depositor per bank are insured by a government agency. Banking and PSU Debt funds, although low risk, are not insured.

Diversification

Banking and PSU debt funds are debt funds, and investing in them can help you diversify your investment portfolio. 

These low-risk investment options (with a good potential to generate decent returns) provide the necessary cushion for your portfolio during volatile times.

Capital Preservation

Banking and PSU debt funds can be a good option if you want higher returns than traditional savings options with the additional advantage of preservation of your capital. while preserving your capital.

These funds invest a majority of their corpus across debt instruments with the highest credit rating. Also, since banks, PSUs, and government agencies issue these securities, the default risk is almost negligible.

Banking and PSU Debt funds are ideal funds if you seek low volatility and stable returns.

Taxation on Banking & PSU Funds

STCG on Banking and PSU Debt Funds

For Banking and PSU Debt funds, STCG or Short Term Capital Gains are gains registered within 3 years of investment.

For investments made before 1st April, 2023: All gains registered within 3 years from investment are taxed at your marginal income tax rate. Marginal income tax rate refers to the highest income tax rate that is applicable based on your income.

For investments made after 1st April, 2023: Unchanged

LTCG on Banking and PSU Debt Funds

For Banking and PSU Debt funds, LTCG or Long Term Capital Gains are gains registered after 3 years of investment.

For investments made before 1st April, 2023: All gains registered after 3 years from investment are taxed at a 20% flat tax rate with the benefit of indexation.

For investments made after 1st April, 2023: From 1st April onwards, all debt capital gains lose LTCG and indexation benefits and will be taxed like STCG - at your marginal income tax rate.

Dividend Distribution Tax on Banking and PSU Debt Funds

Dividends are received from these mutual funds when you invest in their IDCW (Income Distribution Cum Withdrawal) option.

Dividends received are taxed at your marginal income tax rate.

TDS (Tax Deducted at Source) at 10% is applicable on dividends received in excess of Rs 5,000 per AMC per financial year.

Still got questions?
We're here to help.

The ideal investment duration for Banking and PSU debt funds is short to medium term, i.e., 1 to 3 years.
Here are some examples of Banking and PSU Debt funds: UTI Banking & PSU Fund, ICICI Prudential Banking and PSU Debt Fund and ITI Banking & PSU Fund.
Banking and PSU Debt funds are debt funds that invest in debt securities issued by banks, PSUs, and public financial institutions.
Banking and PSU mutual funds invest in debt securities with high credit quality. And since these are large institutions backed by the government, the default risk is minimal. However, that doesn't mean these funds are entirely risk-free. They are exposed to interest rate fluctuations.
As per the Securities Exchange Board of India’s (SEBI) mandate, banking and PSU debt funds must invest at least 80% of assets in debt securities issued by public sector undertakings and banks.
No, banking and PSU debt funds do not have any lock-in period.