What are the features and benefits of Banking & PSU Funds?

What are the features and benefits of Banking & PSU Funds?

For those who are looking for investment schemes to grow their existing wealth, they need to first understand the risks that are associated with investing. Do understand that no investment is entirely risk free, there is always some risk associated. Be it conservative schemes like bank FDs where the risk is of falling interest rates or mutual fund schemes, without taking some risk it is almost impossible to create wealth. Mutual funds are a pool of professionally managed funds that invest in a diversified portfolio of securities for income generation. Although they do not offer fixed returns like bank FDs, mutual funds have outperformed almost all conservative schemes in the recent past. Mutual funds managers have the task of buying / selling securities in such a way that the investment objective of the scheme is achieved. Every mutual fund scheme tracks and aims to outperform its underlying benchmark at some point of time.

Investors who are unhappy with their current investment plans and looking to switch can consider investing in debt schemes like banking and PSU funds.

What are banking and PSU funds?

A banking and PSU fund must invest a minimum of 80 percent of its total assets in bonds, debentures, and certificate of deposits. A banking and PSU fund generally invest in public sector banks that are under the patronage of the Government. Such banks are considered much safer investment option than private sector undertakings. The investment objective of such schemes to offer stable returns while offering high liquidity and investing in securities that have low maturity period. Although banking and PSU funds cannot be completely deemed risk free, they are ideal for medium / short term investment and are considered much safer than other debt funds.

Features of banking and PSU funds

Since this a debt fund whose assets are government backed banks and public sector undertakings, investments in banking and PSU funds can be considered by investors of moderate risk appetite. Here are some of the features of banking and PSU funds –

  • Banking and PSU funds predominantly invest in debt instruments like public financial institutions, banks, and public sector undertakings. Such fixed income securities offer high liquidity and come with a maturity period of up to one year.
  • Since majority of the allocation happens in government back institutions, banking and PSU funds are known to have low credit risk.
  • It is safer to invest in banking and PSU funds as these schemes invest in public sector undertakings that are under the patronage of the government and generally avoid private sector undertakings.
  • Investors seeking for an alternative for bank FDs and carry a low risk appetite can consider diversifying their investment portfolio with banking and PSU funds.

Benefits of investing in banking and PSU funds

Here are some of the primary benefits of investing in banking and PSU funds –

Banking and PSU funds offer high liquidity – These funds predominantly invest in AAA- bonds and equivalent securities, thus making them highly liquid in nature. A fund that offers high liquidity is ideal for someone to build an emergency fund so that they can immediately liquidate their investments in case of an exigency.

Low risk with stable returns – Not everyone is willing to risk their finances by investing in equity markets. Banking and PSU funds have carried minimum investment risk and are known to fetch relatively decent capital gains over the short term.

SIP investment option – Investors can start a monthly SIP to ensure that save and invest a fixed amount in this fund. SIP is ideal for those who wish to inculcate the discipline of regular investing and wish to target their financial goals. SIPs do not come with a lock in period which means investors can continue investing in banking and PSU fund via SIP till their investment objective is achieved.

Edward Powell