In today’s fast-changing investment world, Debt Mutual Funds have become a go-to for investors who prefer stability
over risk. And among these, Banking and PSU Funds stand out, offering a sweet spot between safety, liquidity, and
potentially better returns than traditional savings avenues.
What are Banking and PSU Funds?
Banking and PSU Funds are a type of Debt Fund that mainly invests in bonds issued by banks, public sector companies
(PSUs), government-backed financial institutions, and municipal bodies. According to the SEBI rules, the funds must
invest a minimum of 80% of their money in such bonds. The rest can go into other safe debt and money market
investments.
These funds are best suited for you if you are looking for short- to medium-term options with relatively stable
returns and lower risk compared to Equity Funds.
Features of Banking and PSU Funds
| Feature |
Description |
| Debt-oriented fund |
Invests primarily in debt instruments issued by banks, PSUs and public financial institutions. |
| High credit quality |
Focuses on government-backed or high-rated institutions, reducing default risk. |
| Moderate returns |
Aims to deliver stable returns over the medium term. |
| Lower risk |
Less volatile than equity or equity-oriented funds, suitable for conservative investors. |
| Time period |
Ideal for investors with a short to medium term investment horizon. |
| Diversification |
Provides exposure to a wide range of banking and government-supported debt instruments. |
How do Banking and PSU Funds work?
Banking and PSU Funds collect money from you and use it to buy bonds issued by banks and PSUs. These bonds are
carefully chosen by fund managers based on their safety, return potential, and maturity period. These funds have a
connection with interest rates — when interest rates go up, bond prices go down, and when rates fall, bond prices go
up.
This affects the fund’s net asset value (NAV), but the effect is usually small because these funds invest in
shorter-term bonds. Since they invest in high-quality government-backed institutions, the risk of default is low.
Plus, experienced fund managers manage the portfolio to keep a good balance between returns and safety.
Benefits of Banking and PSU Funds
- Enhanced safety: Government backing of many underlying securities provides stronger credit
protection than Corporate Bonds.
- Better liquidity: These funds typically invest in highly liquid instruments, making them easier
to buy or sell.
- Return potential: They typically offer returns that can potentially outpace traditional savings
instruments over the medium term.
How should you invest in a Banking and PSU Fund?
- Identify your investment objective, such as stable income or capital preservation.
- Compare Banking and PSU Funds based on returns, portfolio quality, and fund manager track record.
- Ensure the fund suits your risk appetite and is for a medium-term investment.
- Choose your investment method — lump sum for surplus funds or Systematic Investment Plans (SIPs) for disciplined
investing.
- Monitor fund performance periodically and review your portfolio based on financial goals.
Taxation rules of Banking and PSU Funds
Banking and PSU Funds, being debt-oriented mutual funds, are subject to uniform taxation rules introduced in 2023.
Under the current tax regime (as of FY 2025-26), capital gains from such funds are considered short-term regardless
of the holding period. This means you will be taxed according to your individual income tax slab, and the earlier
advantage of paying a lower tax rate on long-term holdings with indexation has been removed. It’s important to
factor this in when comparing them with traditional fixed-income options.
Also Read: What is Step-up SIP in Mutual Funds?
Conclusion
Banking and PSU Funds offer a reliable investment option for conservative investors.
With investments in high-quality debt instruments from banks and public sector undertakings, they provide enhanced
safety. These funds are designed to deliver better returns than your traditional FDs or Savings Accounts, with
relatively low risk. A short to medium-term horizon makes them ideal for stability-focused portfolios. Professional
fund management ensures a balanced mix of yield and credit quality.
Disclaimer: This article is for information purpose only. The views expressed in this article
are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd.
and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader
for taking any financial decisions based on the contents and information. Please consult your financial advisor
before making any financial decision.
Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd
is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s
customer is purely voluntary and not linked to availment of any other facility from the Bank. T&C apply.
