Banking & PSU Debt Funds

What are Banking & PSU mutual funds?

Banking & PSU mutual funds are a category of debt funds which invest in 80% of total assets in debt instruments of banks, Public Sector Undertakings, Public Financial Institutions.

What is Modified Duration and why it impacts your portfolio?

Modified Duration expresses the sensitivity of the price of a bond to a change in interest rates. So, if the modified duration of the fund is less (it is similar to have less stock in case of equity mutual fund) the impact on fund will be less and vice versa.
Change in bond price = -Modified Duration * Change in yield
Let’s understand it with an example:
If the modified duration of a bond is 8 and yield expected to fall by 2% in a year, then the change in price will be:
Change in bond price = -2*-2% = +4%

Why should one invest in Banking & PSU mutual funds?

Banking & PSU mutual funds hold on an average 87% of its portfolio in AAArated and rest in AA, unrated papers. Exposure in AA & A may help in generating more yields.
It aims to minimize interest rate volatility in the portfolio and generate optimum return by keeping credit risk low and investing primarily in high quality instruments. This category provides liquidity, carries low risk & volatility and can generate stable returns.

Invest in Banking & PSU mutual funds to get better returns

Who should invest in Banking & PSU mutual funds?

These funds are suitable for investors looking for higher returns than those offered by bank deposits, without taking significantly higher risks. A time frame of 1-2 years would be the minimum holding period.
In fact, in the current scenario, it even makes sense against a bank FD on a post-tax basis. At the end of three years, one can generate almost 6% more on their investment. This is majorly because of the indexation benefit on taxation allowed in money market mutual funds and the fact that unlike bank FDs, gains/interest is not charged on an accrual basis but on a realised gain basis.
For those interested, the calculation is given at the bottom of this post.

What is the tax implication on Banking & PSU mutual funds?

Banking & PSU mutual funds are debt funds and taxed in accordance. For gains redeemed within three years of investing, the gains are taxable per the investor’s personal tax bracket. If the investor redeems after three years of investing, the gains are taxed at 20% with indexation (think of indexation as an inflation adjustment)

What is indexation?

Here’s a brief example of how indexation works (this is a crude illustration to spare you the technical jargon and intricate concepts)
Let’s assume the following:
• Price of 1 kg apple today: INR 100
• Annual inflation: 10%; hence, price of 1 kg apple next year INR 110 (100 price + 10% inflation)
• Annual return on your investment: 15%
• Tax rate: 20% with indexation
Let’s say your investment of INR 100 has grown to INR 115 (at 15% annual returns) in a year. You would be required to pay tax on the gains of INR 15 (INR 115 – INR 100).
However, during this period, the cost of 1 kg apple went up from INR 100 to INR 110 per kg due to inflation – this means that to maintain the same consumption, your INR 100 last year is equal to INR 110 this year.
Indexation benefit as a concept suggests that you pay tax only on the real gains beyond inflation – so instead of paying tax on INR 15 (115 current value – 100 investment), you pay tax on INR 5 (115 current value – 100 investment – 10 cost rise due to inflation)

Available Banking & PSU Debt mutual funds:

Fund Name MyWay Wealth Rating
ICICI Prudential Banking and PSU Debt Fund Growth
   
DSP Banking & PSU Debt Fund Growth
   
Axis Banking & PSU Debt Fund Growth
   
Aditya Birla Sun Life Banking & PSU Debt Fund Growth Plan
   
HDFC Banking & PSU Debt Fund Plan Growth Option
   
SBI Banking and PSU Fund Plan Growth
   
Reliance Banking & PSU Debt Fund Growth
   
Sundaram Banking & PSU Debt Fund Growth Unrated
Kotak Banking and PSU Debt Growth Unrated
UTI Banking & PSU Debt Fund Growth Unrated
IDFC Banking & PSU Debt Fund Growth Unrated
LIC MF Banking & PSU Debt Fund Growth Unrated
L&T Banking & PSU Debt fund Growth Option Unrated
DHFL Pramerica Banking And PSU Debt Fund Growth Unrated
Edelweiss Banking and PSU Debt Fund Growth Unrated
Franklin India Banking & PSU Debt Fund Growth Unrated
Invesco India Banking & PSU Debt Fund – Growth Unrated

How to invest in Banking & PSU Debt fund:
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Banking and PSU Debt Funds

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