Why you should consider banking and PSU debt funds to your portfolio?

In the last few months of 2020, the Indian economy’s recovery from the blows wielded by the first wave of the coronavirus pandemic was stable enough to make market mavericks hopeful. However the resurgence of the second wave has brought the recovery process to a screeching halt and the markets and the economy continue to wallow in uncertainty.

For retail investors, who want to avoid treading on risky terrains in these circumstances, without having to fall back on the traditional FD route, this can be a good time to invest in banking and PSU debt funds.

What are banking and PSU debt funds?

Banking and PSU debt funds are open-ended debt funds that primarily invest in debt instruments of banks and private sector undertakings. As per SEBI regulations, at least 80 percent of the investment has to be with the public sector undertakings, i.e. PSUs, and public sector financial institutions, i.e. PFIs and municipal banks. The funds typically invest in debt securities that have high liquidity and low maturity periods.

The risk factor associated with these funds is on the lower side because the investments are mostly made in AAA-rated or equivalent categories that have high credit ratings. Also, the fact that investments are made in government owned banks makes them a safer bet than private sector undertakings and gives investors the benefit of payment reassurance.

Why you should invest in banking and PSU dent funds?

These funds are highly liquid in nature and are short duration investments. Since investments are made in top-rated instruments, the returns are stable and can provide investors with access to sufficient liquidity during emergencies. Investors can also gain from capital appreciation opportunities when interest rates fall.
These funds are ideal for investors with low risk appetite because they invest in instruments with top notch credit ratings which have least chances of defaulting on payments. Also, the short duration mitigates the risks posed by market volatility and both these factors make banking and PSU debt funds a safer bet than other debt funds.
They offer significantly better returns than fixed deposits that too in a short duration without investors having to lock-in their capital for a specified time period as is the case with FDs.

Banking & PSU Funds are taxed according to the taxation norms of debt funds. Funds held for more than three years will attract long term capital gains tax of 20 percent with indexation benefit while short term capital gains tax will be levied on funds held for less than three years. It is advisable to thoroughly research a fund’s performance before making an investment. It is equally important to have a fair idea of the fund manager and the fund house because it is their responsibility to allocate funds in the right avenues.

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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