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Introduced by SEBI, Banking and PSU fund is a kind of open-ended debt funds. As the name suggests these funds are primarily invested in debt instruments of Banks and Private Sector Undertakings. Though these funds are the safest means of investment, the return in these funds depends majorly on the market conditions.

What are Banking and PSU Funds?

Banking and PSU funds are debt funds.

Banking and PSU Funds are debt mutual fund investments wherein about 80% of the corpus is invested in Bonds, debentures and certificate of deposits. The investment is usually in debt securities having high liquidity and low maturity period.

This mutual fund scheme primarily invests in public sector banks which are under the aegis of the Government. Hence, these funds are much safer than other private sector undertakings. These are short/ medium or ultra short term investments wherein the risk is less compared to other debt funds but cannot be considered completely risk-free.

Though, this mutual fund scheme offers a high return, the same depends on the market volatility. Hence, investors with low-risk appetite may opt for these funds but should keep in mind their financial goal and market conditions before investing.  

banking and psu funds

Features of Banking and PSU Funds

SEBI introduced Banking and PSU a few years ago. These are a kind of Debt Funds where the investment is mainly in Government-backed Banks and Public Sector Undertakings. The following are the main features of Banking and PSU Funds:-

  • Under the Banking and PSU Funds, a minimum of 80% of total assets is invested in debt instruments issued by Banks, Public Sector Undertakings and Public Financial Institutions. 
  • Investment under these funds are mainly in debt securities where the liquidity is high but the maturity period is low.
  • Banking and PSU Funds are a low-risk investment as these mostly invest in AAA-rated or equivalent categories.   
  • In Banking and PSU funds, investment is mainly in public sector banks under the aegis of the Government and hence are safer than other private sector undertakings. Moreover, being Government-owned, there is repayment assurance in these funds.  
  • Investors seeking lower-risk investments may opt for these funds considering the market conditions and change in interest rates.

Benefits and Limitations of Banking and PSU Funds 

The following are the benefits of Banking and PSU Funds:-
  • High Liquidity: These funds invest in AAA-rated or equally high categories thereby making them highly liquid in nature. These schemes are short duration investment scheme where the returns and stable. Banking and PSU Funds offer higher liquidity as an investor is at liberty to have access to instant liquidity in times of emergencies.
  • Low Risk: Investment under these Funds are for a short duration of time hence the market volatility does not hamper the return which works best for investors seeking lower-risk investments. These funds are not completely risk-free but carry lesser risk than other debt funds.
  • High Returns: Banking and PSU Funds generate higher returns than savings accounts or Fixed Deposits. These funds are for investors looking for a steady return in a short duration of time. 
  • Tax Saver: If the profits in banking and PSU funds are held for more than 3 years the same comes under long term capital gain. Hence, 20% tax with indexation is applicable. However, if an investor redeems it before 3 years, short term capital gain tax will apply. Thus, tax as per the income tax slab of the investor will be applicable.

Though Banking and PSU funds are a safer and low-risk investment option, these have certain limitations as well. These funds face risks from the interest rate movement. Hence, at times of change in the interest rate, these funds may not generate high returns. This makes them not entirely risk-free.

Following are the limitations associated with Banking and PSU Funds:-
  • High Nav: As these funds are low-risk fund schemes, these funds are gaining popularity among the investors with low-risk appetite. This further makes the cost of investing substantial which further impose a financial burden on the investor.
  • Low Returns: The returns in a Banking and PSU Fund are lower than the equity mutual funds. As these funds are issued by the large-cap companies, there are high chances of increase in the stock prices. Thus, though there is the assurance of repayment, the same may not be substantial.
  • Short-Term Investment Scheme: Banking and PSU Funds are short term mutual fund scheme. The holding period of these mutual fund scheme ranges from 1 year to a maximum of 3 years. Hence, this fund is not for the ones who have a long term investment plan.

Things to remember before investing 

It is very important for an investor to do proper value research and analysis before investing. The various factors like the risk associated with the investment, the financial goal and the returns accrued should be taken into consideration before making the investment.

The following are some of the most important things an investor should remember before investing in a Banking and PSU Scheme:

  1. Financial Goal: Every investor has a particular financial goal to achieve. Hence, the investor should analyse whether the investment objective is aligned with the financial goal.
  2. Fund Performance:  Before making an investment one should thoroughly research the performance of the fund. A consistently top performing fund will ensure good returns to the investors.
  3. Fund House and Management: With various fund houses operating, it becomes very important to choose the right fund house with experts at the management wheel. This will further ensure that the funds are allocated in the right channel.  With expert fund managers steering your investment in the right path will help the investment flourish even during adverse market conditions.
  4. Costs Involved: Any return in investment does not come free. There is a certain cost involved in mutual fund investments like the entry and exit load, management fee, expense ratio etc. Hence one should keep in mind the cost involved before making the investment.

Who should invest in Banking and PSU Funds

Banking and PSU Funds are short term income funds. These funds are safer than any other debt funds like a dynamic bond fund or credit risk fund. Hence, these funds are ideal for investors because of the following reasons :

  • This mutual fund scheme is ideal for investors seeking lower-risk investment options. Being less market volatile, these funds are a good option for investors who are looking for short term or ultra short term investment with low risk.
  •  Investors who are looking for higher returns may opt for this mutual fund scheme. Though the return in these funds is higher than FD’s, the risk is also comparatively higher.
  • Investors looking for a short term or medium term investment may opt for this funds. Banking and PSU funds have a maturity period of 1-2 years.
  • Investors looking for high liquidity and credit quality may invest in these mutual fund scheme keeping in mind the investment objective and financial goal.


In Banking and PSU Funds it is mandatory to invest a minimum of 80% of total assets in debt instruments issued by Banks, Public Sector Undertakings and Public Financial Institutions. They tend to invest in medium to long-duration securities and hence are exposed to higher variations when interest rates change. 

The category accounts for close to 8% of the total assets in the Debt Segment. We assess the credit quality of funds in this category as relatively poor. 

“At Scripbox we do not recommend funds in this category since we believe that the potential incremental return is not justified by the higher credit risk and higher interest rate risk”.

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