Banking & PSU Fund
A Banking & PSU fund is an open-ended debt mutual fund that invests a minimum of 80% of its total assets in debt instruments issued by banks, public sector undertakings (PSUs), and public financial institutions (PFIs), offering investors relatively high credit quality within the debt fund universe.
SEBI's 2017 categorisation circular formally defined Banking & PSU funds and mandated the 80% minimum allocation to issuers in this space. The rationale behind the category is that banks, PSUs, and PFIs are considered to carry an implicit or explicit sovereign or quasi-sovereign backing, making defaults extremely rare. This credit quality comfort has made Banking & PSU funds a popular alternative to pure gilt funds for investors who want safety without taking on significant duration risk.
The issuer universe for these funds is substantial. On the banking side, funds can invest in bonds issued by SBI, HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank, and a wide range of public sector banks such as Bank of Baroda and Punjab National Bank. On the PSU and PFI side, prominent issuers include NABARD, NHB, NHAI, IRFC, Power Finance Corporation, REC Limited, and NTPC. These entities regularly tap the bond market for long-term infrastructure financing, providing a steady supply of high-rated paper.
Because issuer selection is restricted, returns in the Banking & PSU category are primarily driven by duration management and interest rate movements rather than credit spreads. Fund managers may hold anywhere from 1-year paper to 10-year bonds depending on their rate outlook, which means the category can display varying levels of interest rate sensitivity across fund houses. Some funds in this category have historically maintained a relatively short-to-medium duration profile (2–4 years), while others have extended duration aggressively during rate-cut cycles.
The credit profile of Banking & PSU funds is typically overwhelmingly AAA or equivalent, with sovereign-rated instruments from time to time. Downgrades within this universe are unusual, which is why the category attracted significant inflows after the credit events of 2018–19 that rattled categories such as credit risk funds and medium-duration funds.
For taxation, the same rules applicable to debt funds post the Finance Act 2023 apply here. Units acquired on or after 1 April 2023 attract slab-rate taxation on gains, regardless of holding period. For units acquired before that date, the earlier indexation benefit for long-term capital gains (held over 3 years) was available.
Investors typically use Banking & PSU funds for parking medium-term surpluses of 1–3 years where capital preservation is a priority and they are comfortable accepting moderate interest-rate risk in exchange for marginally better yields than liquid or money market funds.