Banking & PSU Funds is a class of Debt funds. Ideally these funds invest into Public Sector Bank bonds and PSU debentures or Bonds like Nabard, IRFC, NHAI, REC etc.. While these are not capital guaranteed investments, the fact that they are state owned means that there is an implicit guarantee that the underlying investments are principal protected. Banking & PSU funds have existed in the industry for well over 10 years now.. however it is only now that the industry is waking up to it..
Recency bias is the behavior trait wherein the recent events play an enormously large part in decision making as compared to events that may have occurred sometime back. For example, life/health insurance sales peak in the period immediately following the pandemic , due to the fear in people’s mind. While recency bias to a limited extent is a survival instinct built into us by nature and is considered necessary. Sometimes it leads to inaccurate decisions esp when it is entirely depended upon.
What are the reasons for the recent interest in Banking & PSU Funds ?
Over the past two plus years, the Indian debt market has had a challenging time, the number of
Companies that have died would seem to suggest a covid like pandemic in the debt market, however that is a discussion for another day. The last few years have seen reasonably large institutions going bust due to their liquidity issues ILFS, YES Bank, DHFL, Essel group to name but a few that have faced challenging times. The emergence of the Covid shutdowns in Mid March and acute liquidity problems in the bond markets claimed another victim in Franklin , winding up 6 schemes which faced liquidity challenges. That was the last straw on the camels back for the retail investor. My guess is over Rs 100,000 crores would have moved from debt Mutual Funds esp Credit Risk Funds, Corporate Fixed Deposits and other higher risk debt instruments to more safer havens like PSU bank FDs. However the drop in PSU Bank FD rates means that retail investors are hardly even covering their inflation figures.. hence with the economy showing signs of improvement the investors are seeking a better place for their moneys.
With Safety foremost in their minds, the best place to explore returns is the Banking & PSU fund, which is considered safe from a default perspective.
Caution : The Banking & PSU fund’s Asset Under Management stands at a modest Rs 1,00,000 Crores, of which Rs 60,000 Crores have been added in the last year alone. Also the last one year return of this category has been 9-11% per annum , given the flight for safety and therefore demand for PSU bonds.
Conclusion : Investors looking for a safety in their investment portfolio with a higher returns than what is offered in the bank should look at 3 year growth option in Banking & PSU Funds to optimize on their taxation, and should expect about 6.00 – 7.00% per annum ( which is significantly higher than the Bank Deposit). However the past high returns is history and if the investor is chasing that he is bound to be disappointed.
PS : I would also look for contrarian bets in the Medium term and Corporate Bond space with high rated company papers for a better returns over the next 3 years.
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Risk Factors : Mutual Fund investments are subject to market risks and investors may read the offer document before investing. The views expressed herein are those of the individual analyst and not that of Finsherpa Investment Services. Investors must do a thorough reading and suitability analysis before deciding if these are suitable to them.