Government-backed investments are generally sought out by conservative investors scoping out the safest market-linked products. Banking and PSU funds are among the safest bets for such investors, which usually provides better returns than FDs.

What are Banking and PSU Funds?

Banking and PSU funds are debt funds that invest at least 80% of the corpus in debt securities issued by banks and other public sector companies. 


The underlying assets usually consist of company bonds, certificates of deposits, debentures and more, issued by companies with a credit rating of AAA and higher.

How Do Banking and PSU Debt Funds Work?

The portfolio composition of these funds is primarily made up of debt instruments with lower maturity periods and higher liquidity. While most assets are of quasi-sovereign sources, such as public sector banks and municipal bodies, the bonds of large-cap banks also make up a significant portion.


Because of this, you have the guarantee of investing in high-credit quality assets, while other funds can have options to invest in low-quality assets as well.

Pros of Banking and PSU Debt Funds

There are quite a few advantages related to investing in Banking and PSU debt funds. These are as follows:

  • Better Security

Banking and PSU funds are backed by the Government of India. This increases the level of security and reduces the overall risk in your investment portfolio.

  • High Liquidity

These funds are extremely liquid because of the investment in highly rated short-term assets. This lets you easily offload the funds in case of emergencies. 

  • Low Risk

These funds are not completely risk free, owing to their vulnerability to interest rate changes. However, the associated risks are minimal with the corpus backed by the central government.

Cons of Banking and PSU Debt Funds

While being a highly desirable debt investment option, Banking and PSU funds also come with several disadvantages, namely:

  • Low Returns

Due to the asset composition being mainly in large-cap companies, apart from government-based securities, the returns are mostly assured. There is a little scope for the increase in stock prices of these companies. Due to this, the profits may not be significant.

  • High NAV

Due to its low-risk properties, these funds are highly sought out in the market.  This can drive up its NAV or net asset value, making it very expensive. 

Things to Consider Before Investing in Banking and PSU Debt Funds

Once you consider the pros and cons of investing in Banking and PSU debt funds, keep in mind a few other points before investing. They are: 

  • Short Investment Horizon

These funds are ideal for an investment horizon of 2-3 years, making it ideal for investors seeking short-term avenues. 

  • Interest Rate Influence

Returns from Banking & PSU debt funds depend on interest rate changes. Simply put, if the interest rates increase, these schemes may not generate the expected results.

  • Tax Implication

According to tax reforms as of April 1 2023, debt funds purchased on or after April 1 2022, will be taxed as per your income tax slab. However, short-term capital gains tax will be levied for a holding period of less than 36 months for older investments. 


For holding periods higher than 36 months, 20% long-term capital gains tax is applicable, with the benefit of indexation.

Who Should Consider Investing in Banking and PSU Debt Funds

Investors with a low-risk appetite seeking to earn not necessarily high but steady income can consider investing in Banking and PSU funds. With capital preservation properties and less associated risk than equities, they are a good option for the liquid asset allocation of your investment portfolio.

FAQs on Bank & PSU Funds

Which are the top PSU banks?

A few of the leading PSU banks in India include the State Bank of India, Punjab National Bank, Bank of Baroda, Bank of India, Bank of Maharashtra, Union Bank of India and Canara Bank.

Is investing in a banking and PSU debt fund safe?

These funds are among the safest debt fund options available in the market. This is because these invest in entities of banks and government-backed or owned PSUs, negating credit risk. However, returns are based on changes in the interest rate cycle.

Are banking and PSU debt fund returns better vs FD returns?

The returns offered by these funds are slightly higher than those offered by FDs. PSU banking funds are good alternatives for FD investments. However, before investing, you must consider the elevated risk and short maturity period associated with these funds.

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