Banking & PSU Debt Funds Better Alternative In Falling Interest Rate Regime: Best Mutual Funds In The Category

What Are Banking & PSU Debt Funds?

Banking & PSU Funds are open-ended debt funds and primarily invest in debt instruments of banks, Public Sector Undertakings (PSUs) and Public Financial Institutions as classified by SEBI. Instruments being bonds, debentures and certificate of deposits or CDs that are of high liquidity and low average maturity.
Earlier the category was also referred as short term funds or income funds

Who Should Invest In Banking & PSU Debt Funds?

These are consider a better alternative to bank fixed deposits and are suitable for investors who can take a slight risk for a higher return as the funds typically invest in AAA rated instruments that have high credit ratings.

Also these are low in risk with government ownership that reassures repayment. So, investors looking for stability in credit profile and less of volatility can invest in these funds.

Return from Banking & PSU Debt Funds over different time period

Year to date the category has provided gains of 4.9% on an average, with best performing fund seeing gains of 7.1%. In a one-year period, the best performing fund delivered 14.5% return while average return from the category was at 10.5%.

Advantages of Banking & PSU Funds

1. Low risk:

The risk in these fund type is free of market volatility and investments are in short or medium term for high credit papers.

2. High liquidity:

These are traded in good quantity and hence share good liquidity. Investment is typically in PSU bonds such as that of SIDBI etc.

3. High return for slight risk:

In the short term, if on taking slight risk one wants to get a higher return than Bank FDs during current falling interest rate regime one can tap this mutual fund category.
Understanding Interest Rate Risk In Banking & PSU Funds

Not immune to risk these mutual funds carry interest rate risk. In an event when interest rates in the market go higher or are steady, these funds can perform poorly. Also, when yields go high, they deliver negative returns.

Best Banking & PSU Debt Funds:

1. Edelweiss Banking and PSU Debt Fund - Regular Plan - Growth: With Crisil 5 rating,this is the best Mutual fund from the category with AUM of Rs. 203.9 crore. NAV of the plan as on June 8, 2020 is 18.05. And over a 1-year time frame, the fund's return are to the tune of 13.91%.
Expense ratio of the scheme is 0.55%.

2. DSP Banking & PSU Debt Fund - Regular Plan - Growth: Again a CRISIL 5-star rated MF. The fund has an asset base of Rs. 2424.27 crore and an expense ratio of 0.56%. NAV as on June 8, 2020 is 17.84. Investors both in one-time and as SIP can invest a minimum of Rs. 500 in the scheme. Against the category benchmark CRISIL 10 Year Gilt Index of 12.46%, the fund has delivered 1-year return of 11.42%.

3. Nippon India Banking & PSU Debt Fund - Regular Plan - Growth: 4-Star CRISIL rated mutual fund boast of a fund size of Rs. 4517 crore. Investors can invest in the scheme for as less as Rs. 100 SIP and one time investment of Rs. 5000. The scheme over the 1-year time has returned 11.43%. NAV of the scheme and expense ratio is at 15.28 and 0.79%, respectively.

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