Banking and PSU Funds: Safe but need to lower return expectations

Banking & PSU Debt Funds is a category within the open ended debt schemes which predominantly invest in a portfolio of Debt Securities and Money Market Instruments issued by Banks, Public Sector Undertakings, Public Financial Institutions, entities and Municipal Bonds. This fund category has of late caught the attention of debt fund investors who want relatively safer fixed income portfolios. With the announcement of Mirae Asset Banking and PSU Debt Fund the category now was 20 funds. As per SEBI classification, a banking & PSU fund is an open ended debt scheme which has to invest at least 80% of its assets in debt instruments of banks, public sector undertakings and public financial institutions.
The recent returns from this category of funds has been better than those of other debt funds and there is a good degree of safety and liquidity in these funds. These funds are suitable for investors looking at savings in a debt fund for an investment horizon of 1-2 years as for longer periods interest rate changes may pose a risk.

Salient Features / Developments:

  • Banking and PSU Debt Funds generally maintain a portfolio duration of 2 to 5 years and make  use of G-secs to shift duration. There are some exceptions whre fund amangers may maintaoin a llow or high averge duration for portfolio to take advatnge of anticipated trends in interest rates.
  • PSU and Debt funds are benchmarked against NIFTY Banking and PSU Debt Index.
  • As on April 30, AUM of corporate bond funds stood around Rs 86,290 crore, AUM of credit risk funds at Rs 35,220 crore and AUM of banking & PSU funds at Rs 79,240 crore. This is indicative of growing clout of these fund which have managed sighnifica nt growth in last one year.
  • In May 2020, SEBI made changes in banking & PSU funds. Now the minimum investment in debt instruments of banks, public sector undertakings, public financial institutions and municipal bonds for these funds  has been revised to 65% from 80%. SEBI has changed the characteristics of  three debt funds which include corporate debt fund, Credit risk fund and PSU and Debt fund after industry body AMFI wrote to the market regulator. Fund houses sought permission to increase exposure in G-sec and T-bills, as corporate bonds have turned out to be less liquid and riskier due to the covid-19 outbreak.
  • With decreasing interest rates in the last one year, these funds have performed well. The indicative category returns from Banking & PSU Debt Funds funds are :
  • It may be noted that above performance is not likely to be repeated as interest rates have already moved down.

There are around 20 Banking and PSU Debt Funds. Based on a quite simplistic criteria based on their returns i.e. the Funds should be in the Top ten performers in each of the 1 year, 6 month and 3 month preceding time periods, narrows down the list to following four funds. We have added one more Fund from HDFC as YTM 3 of these funds is low which may result in lower returns in future.

Fund NameAUM  (Cr)Expense(%)Ret% 1yRet% 6m
DSP Banking & PSU Debt Fund3,1430.3012.557.78
Edelweiss Banking and PSU Debt Fund259.000.2014.0910.26
HDFC Banking and PSU Debt Fund6,4160.3611.907.33
IDFC Banking & PSU Debt Fund16,9670.3012.947.82
Nippon India Banking & PSU Debt Fund5,2110.3112.707.86

Apart from Historical returns some other important parameters relevant to a Debt Fund and general details are depicted:

Parameter /  SchemeDSP Edelweiss HDFCIDFCNippon
Average Maturity (Yrs)3.198.743.832.743.27
Av Category Maturity3.833.833.833.833.83
Modified Matuarity 2.706.102.942.362.70
Av Categ Mod. Maturity2.832.832.832.832.83
YTM of portfolio5.14%6.57%6.41%5.25%5.28%
Av Category YTM5.45%5.45%5.45%5.45%5.45%
Crisil  Rank55134
Risk vs categoryavg.abv avgabv avgabv avgavg
Ret%  3 year9.01%10.64%9.87%9.32%
Ret% 1 y12.5514.0911.912.9412.70
Ret % 6m7.7810.267.337.827.86
Ret%  3m5.116.924.585.255.28
Ret%  1m1.692.941.841.851.89
Expense Ratio (%)0.300.200.360.300.31
Standard Deviation2.112.902.462.432.21
Fund Mgr -1  (Tenure)Saurabh Bhatia (2.4)Gautam Kaul (2.6)Anil Bamboli (6.3)Anurag Mittal (3.2)Vivek Sharma (0.1)
Fund Mgr -2  (Tenure)Vikram Chopra (4),Dhawal Dalal (3.6)PR Pimple (0.5)

  • Yield to Maturity:  The YTM of a portfolio is the rate of return an investor could expect if all securities in the portfolio are held until maturity. It broadly indicates to the investor the kind of returns he can expect but YTM changes due to active management by the Fund manager.
  • Modified Duration (MD): Bond prices and interest rates are inversely related. MD is the change in the value of a debt security in response to the  will decrease by 5.2% with a  100 basis point increase in interest rates. The higher the MD, the more volatility the bond exhibits with a change in interest rates.
  • Weighted Average Maturity or simply  average maturity of a debt fund is the average time it takes for securities in the portfolio to mature, weighted in proportion to the amount invested.

Average maturity indicates the sensitivity of the portfolio to interest rate changes. The average maturity of a scheme gives a broad idea if the debt fund is suitable for the time horizon of one’s investment. The Outperformance of Edelweiss fund has largely been driven due to its holding higher av. Maturity debt instruments than peers. This is good if interest rates fall further about is quite risky when interest rates start to rise.

Low YTM of schemes indicates that future returns are not likely to be in line with historical returns enjoyed on account of falling interest rates seen in the last few years.


  • Past performance may or may not be sustained in future and should not be used as a basis for comparison with other investments.
  • These funds do face risks from the interest rate movement. In past, some funds performed poorly in case of hardening or flattish interest rate. If yields go up, returns can become negative in some periods.
  • In general the risks in these scheme range from moderately low to moderate.
  • Suitability and Assessment
  • Banking & PSU funds are a good alternative to Fixed Deposits, if one wants slightly higher returns than FDs in short tenure and can take little risks. 
  • Banking and PSU Funds carry a low risk of market volatility as they invests in high credit quality funds, It is not completely risk free as some funds do invest AA rated instriuments and AT-1 bonds as well, but carries a lower risk than many other debt funds.
  • Interest in these funds has revived in recent times because of their worry over debt funds due to downgrades and defaults. COVID-19 has further raised these concerns. 
  • Investors looking for higher returns post the sharp cut of interest rates in small savings products and bank deposits have  turned  to banking and PSU debt funds. These expectations have been met in prceeeding time period due to RBI stance in lowering the rates. In general in a stable interest regime, these funds could give investors earn 50-200  basis points higher than small savings products. However past return like 10%  for last one year are unlikely to be met.  Thus investors should  lower their return expectations, given the sharp cuts by the RBI and subsequent cut in small savings rates.
  • Historical Return wise Edelweiss Banking and PSU Fund has outperformed others. It has a high Averge and modified duration and those investing in it should be careful to move out on any indication of ujpick in intyerest rfates. HDFC Banking and PSY fund has muted historical perfoamce but has better YTM due to reliance on AT-1 Bonds and some AA bonds and thus could give reasonable returns going forward.
  • Time Horizon for Investment: For 1-2 year.  ( review needed if any possibiliy of increase in interest rfates)


The above note is based on information collated from various sources in the  public domain and should not be construed as a solicitation or  advice to go for or avoid these Mutual Funds. The   information provided in this write-up  is meant only for general reading and educational purposes and the contents are based on my limited knowledge and understanding of the product, the Mutual Fund and  other financial instruments.

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