PSU (Public Sector Undertaking) Debt Funds are a type of debt mutual fund that primarily invests in debt securities issued by public sector enterprises (PSEs), public sector banks, and government-backed financial institutions. These funds are known for their relative safety compared to other debt categories, as PSUs are often supported by the government, reducing default risks.
As per SEBI categorisation of Debt Fund Categories, Banking and Debt funds must have minimum 80% in Debt instruments of banks, Public Sector Undertakings, Public Financial Institutions and Municipal Bonds.
PSU debt funds work by investing primarily in debt securities issued by Public Sector Undertakings (PSUs), government-owned financial institutions, and public sector banks. These funds generate returns through interest payments from bonds and capital appreciation when bond prices rise due to falling interest rates. Since PSUs are government-backed entities, the credit risk is lower, making these funds relatively stable investments, but they remain sensitive to interest rate fluctuations, impacting their short-term performance.
Key Differences: PSU Debt Funds vs. PSU Thematic Funds
A critical distinction exists between PSU debt funds and PSU thematic funds. Below is a table highlighting their differences:
| Feature | PSU Debt Funds | PSU Thematic Funds |
|---|---|---|
| Asset Type | Invest in fixed-income instruments issued by PSUs and government entities. | Invest in equity and equity-related instruments of PSU companies. |
| Risk Profile | Lower risk due to debt exposure. | Higher risk due to equity exposure and 80% concentration on one theme. |
| Return Potential | Moderate returns, often in line with bond yields. | High return potential but with market-linked volatility. |
| Investment Horizon | Suitable for short to medium-term investors. | Suitable for long-term investors seeking capital appreciation. |
| Interest Rate Sensitivity | Highly sensitive to interest rate changes. | Less sensitive to interest rate changes but more to stock market volatility. |
| Example Funds | SBI Banking & PSU Debt Fund, HDFC Banking & PSU Debt Fund. | CPSE ETF, SBI PSU Fund, ICICI Prudential Bharat 22 ETF. |
Risk and Return Profile of PSU Debt Funds
1. Risk Factors
(a) Interest Rate Risk
PSU debt funds are influenced by interest rate fluctuations. When interest rates rise, bond prices fall, leading to lower NAVs (Net Asset Values).
(b) Credit Risk
Though PSU entities are backed by the government, there remains a minor credit risk, especially in case of corporate PSU bonds.
(c) Liquidity Risk
Some PSU debt securities may have lower trading volumes, making it difficult to exit the investment quickly.
2. Expected Returns
(a) Moderate & Stable
Returns typically range between 6%-8%, making them suitable for conservative investors.
(b) Better than Government Bonds
Since PSU bonds generally offer slightly higher yields than government securities, PSU debt funds can provide a superior risk-adjusted return.
Key Insights from Performance Tables
1-Year Performance Review
Top PSU Debt Funds with 1-Year Return
Source: Kuvera, Feb 28, 2025
Key Takeaways
- Best Performer: Edelweiss Banking & PSU Debt Fund delivered the highest 1-year return of 8.10%.
- Low Expense Ratio (TER): TrustMF Banking & PSU Debt Fund has the lowest expense ratio (0.21%), making it cost-effective.
- Top AMCs: Major players such as Kotak, SBI, and HDFC feature prominently, indicating investor trust.
3-Year Performance Review
Top PSU Debt Funds with 3-Year Return
| Sr. No. | Fund | 3-yr Return | TER | AMC |
|---|---|---|---|---|
| 1 | UTI Banking & PSU Growth Direct Plan | 8.65% | 0.36% | UTI Mutual Fund |
| 2 | Kotak Banking & PSU Growth Direct Plan | 6.74% | 0.39% | Kotak Mahindra Mutual Fund |
| 3 | SBI Banking & PSU Growth Direct Plan | 6.31% | 0.39% | SBI Mutual Fund |
| 4 | Sundaram Banking & PSU Growth Direct Plan | 6.18% | 0.27% | Sundaram Mutual Fund |
| 5 | TrustMF Banking & PSU Growth Direct Plan | 5.97% | 0.21% | Trust Mutual Fund |
| 6 | ITI Banking & PSU Debt Growth Direct Plan | 6.81% | 0.15% | ITI Mutual Fund |
| 7 | HDFC Banking & PSU Debt Growth Direct Plan | 6.58% | 0.39% | HDFC Mutual Fund |
| 8 | LIC MF Banking & PSU Growth Direct Plan | 6.50% | 0.28% | LIC Mutual Fund |
| 9 | DSP Banking & PSU Debt Growth Direct Plan | 6.48% | 0.32% | DSP Mutual Fund |
| 10 | Bandhan Banking & PSU Debt Growth Direct Plan | 6.45% | 0.33% | Bandhan Mutual Fund |
Source: Kuvera, Feb 28, 2025
Key Takeaways
- Best Long-Term Performer: UTI Banking & PSU Growth Direct Plan delivered the highest 3-year return of 8.65%.
- High Expense Ratio Funds: Kotak, HDFC, and SBI PSU Debt Funds have an expense ratio of 0.39%, which is among the highest.
- Cost-Effective Option: ITI Banking & PSU Debt Growth Direct Plan has the lowest TER at 0.15%, making it a great low-cost option.
Investor Considerations Before Investing in PSU Debt Funds
1. Investment Horizon
Ideal for medium-term investors (2-3 years). Short-term fluctuations due to interest rates must be considered.
2. Expense Ratio (TER)
Lower TER funds are cost-efficient. TrustMF (0.21%) and ITI (0.15%) are good low-cost options.
3. Interest Rate Trends
Investors should monitor RBI’s monetary policy and interest rate cycles.
4. Taxation
PSU debt funds attract debt taxation rules. Gains from units held for less than 3 years are taxed as per income slabs, while long-term gains are also taxed.
5. Diversification
Although PSU funds are safe, diversifying across different types of debt instruments can improve risk-adjusted returns.
Wrapping Up
PSU debt funds provide stable, government-backed returns with lower risk than corporate debt funds. They might better suit conservative investors seeking better yields than FDs while maintaining capital safety during medium term duration. However, keeping an eye on expense ratios, interest rates, and investment horizon is essential for maximising returns.
To start with your journey of investment in the PSU Debt funds, don’t forget to sign up at Kuvera.
Interested in how we think about the markets?
Read more: Zen And The Art Of Investing
Watch here: Is UPI Killing the Toffee Business?
Start investing through a platform that brings goal planning and investing to your fingertips. Visit kuvera.in to discover Direct Plans of Mutual Funds and Fixed Deposits and start investing today.
AREVUK Advisory Services Pvt Ltd | SEBI Registration No. INA200005166
DISCLAIMER: Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors. Investments in securities market are subject to market risks. Read all the related documents carefully before investing. The securities quoted are for illustration only and are not recommendatory.
