Public Sector Undertaking (PSU) funds have garnered significant investor attention, especially in times of market uncertainty. With a mix of defensive characteristics and cyclical growth potential, PSU thematic funds can provide unique opportunities for investors. This article delves into PSU funds, thematic funds, and PSU thematic funds, analysing their risk-return profiles and discussing the current market volatility’s impact on their future potential.
Understanding PSU Funds, Thematic Funds, and PSU Thematic Funds
(A) PSU Funds
PSU funds are mutual funds that primarily invest in publicly owned companies where the governments (central/state) hold a significant stake. These funds typically focus on sectors such as banking, oil & gas, power, and infrastructure.
(B) Thematic Funds
Thematic funds are equity mutual funds that invest 80% in specific themes, such as infrastructure, consumption, digital innovation, or sustainability. Unlike sectoral funds, thematic funds have a broader scope but remain focused on a specific investment thesis.
(C) PSU Thematic Funds
PSU thematic funds are a subset of thematic funds that invest exclusively in public sector enterprises, aiming to capitalise on government policies, reforms, and economic growth initiatives. These funds focus on industries like energy, finance, and infrastructure, which play a crucial role in the economy.
Risk and Return Profile of PSU Thematic Funds
Risk Profile
1. Market Volatility Risk
Since PSUs are highly sensitive to economic policies and government interventions, they can experience significant volatility. Fluctuations in interest rates, global economic conditions, and sector-specific regulations can amplify this risk.
2. Regulatory & Policy Risk
Changes in government policies, disinvestment plans, and regulatory frameworks can directly impact PSU stocks. The extent of government control may affect decision-making and profitability.
3. Sector-Specific Risk
Many PSU funds are concentrated in a few industries, such as energy, banking, and infrastructure, leading to potential sectoral downturn risks. If one sector underperforms due to external factors, the entire fund’s performance may be adversely affected.
4. Liquidity Risk
Some PSU stocks, particularly smaller government-owned enterprises, may have lower trading volumes, making it difficult to exit positions quickly during market downturns.
Current Scenario of PSU Thematic Funds in India
PSU thematic funds, which experienced significant gains from 2021 to 2024, have recently underperformed, declining by an average of 18.4% over the past six months. This downturn is primarily attributed to overvaluation in sectors like defense, capital goods, railways, and PSU banks, leading to corrections when earnings did not meet market expectations. Profit booking by investors further contributed to the decline. Given the cyclical nature of PSU businesses and their sensitivity to government policies, a swift recovery appears unlikely. Experts suggest that while early investors might consider booking profits, those with a long-term horizon of 7-10 years may choose to stay invested.
Return Profile
Despite short-term volatility, PSU thematic funds have demonstrated strong long-term returns, particularly during economic recoveries and growth cycles. The potential for government support, stable dividend payouts, and undervaluation compared to private peers create an attractive investment avenue.
1. Cyclical Growth Potential
During phases of economic expansion and increased infrastructure spending, PSU stocks tend to perform well, often outperforming the broader market.
2. Dividend Yields
PSUs are known for offering stable dividend payouts, making them attractive for income-seeking investors.
3. Valuation Opportunities
Many PSU stocks trade at lower price-to-earnings (P/E) multiples than private counterparts, providing a value investing opportunity.
As seen in the table below, some PSU funds have delivered robust 3-year returns despite recent short-term declines:
Top PSU Funds with 1-year and 3-year Return
| Sr. No. | Funds | 1 Yr Return | 3 Yr Return | TER |
|---|---|---|---|---|
| 1 | SBI PSU Growth Direct Plan | -4.11% | 30.91% | 0.78% |
| 2 | Quant PSU Growth Direct Plan | -7.45% | NA | 0.93% |
| 3 | ICICI Prudential PSU Equity Growth Direct Plan | -5.86 | NA | 0.84% |
| 4 | Invesco India PSU Equity Growth Direct Plan | -8.11% | 28.59% | 0.85% |
| 5 | Aditya Birla Sun Life PSU Equity Growth Direct Plan | -11.99% | 28.60% | 0.55% |
Source: Kuvera, Feb 28, 2025
Current Market Volatility Impact and Future Opportunities
Short-Term Challenges
1. Global Economic Uncertainty
Rising inflation, interest rate hikes, and geopolitical tensions have led to increased volatility in PSU stocks.
2. Profit Booking
After a strong rally in PSU stocks over the past few years, some investors have started booking profits, leading to short-term corrections.
Long-Term Opportunities
1. Government Reforms and Privatisation
The Indian government’s continued efforts in PSU disinvestment and privatisation could unlock higher valuations for PSU stocks.
2. Infrastructure Growth
Increased capital expenditure in infrastructure, defense, and renewable energy is expected to benefit PSU companies.
3. Attractive Valuations
Many PSU stocks are still trading at relatively lower price-to-earnings (P/E) ratios compared to private sector peers, providing a value investment opportunity.
Expert Views on PSU Thematic Funds
1. AMFI & SEBI Insights
Thematic funds, particularly PSU-focused ones, have seen increased inflows due to government policy support and rising investor confidence.
2. Market Analysts
Experts from leading financial firms such as Motilal Oswal and ICICI Securities suggest that well-managed PSU thematic funds could outperform broader markets in the next growth cycle.
3. Investment Strategists
Many fund managers believe PSU stocks offer an asymmetric risk-reward opportunity, given their stable dividend yields and potential for value unlocking through strategic sales and policy reforms.
Wrapping Up
Investors looking for long-term capital appreciation with moderate-to-high risk tolerance can consider PSU thematic funds. While short-term volatility may persist, the long-term structural reforms and economic growth prospects provide compelling reasons to invest. However, careful fund selection and a diversified portfolio approach are essential to mitigate risks.
As the PSU sector continues to evolve, investors should keep an eye on government policies, global economic trends, and sectoral performance. PSU thematic funds can be a rewarding investment avenue for those willing to navigate short-term fluctuations for long-term gains.
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