Skip to content

Unveiling the Potential of PSU Banking Debt Funds – Introduction

psu banking debt fundsBanking and PSU Debt Funds represent a specialised category within the debt segment, introduced by the Securities and Exchange Board of India (SEBI). These funds primarily invest a minimum of 80% of their net assets in debt instruments issued by Public Sector Undertakings (PSUs), banks, Municipal Bonds and Public Financial Institutions. In this article, we will cover everything you need to know about debt funds.

What Are PSU Debt Funds?

PSU Debt funds are open-ended funds designed to offer liquidity and maintain a low-risk, low-volatility profile while aiming for reasonable returns. They typically invest in debt instruments such as bonds and debentures, focusing on high-credit quality or AAA-rated securities with short to medium-term maturities.

These instruments are often backed by the government, reducing the risk of default significantly.

Risk-averse investors seeking stability in their investment portfolios can opt for banking and PSU debt funds due to their minimal risk exposure. These funds prioritise credit quality and liquidity, making them suitable for investors looking for alternatives to traditional bank deposits.

Who Should You Invest in PSU Mutual Funds?

It is important to understand who can benefit the most from investing in banking PSU mutual funds. Let’s understand more in detail:

1. Long-term Investors

Investors with a long-term investment horizon can benefit from PSU mutual funds. These funds have the potential to deliver steady returns over time. It is suitable, especially during market downturns.

2. Risk-averse Investors

Investors who prioritise capital preservation and seek minimal risk exposure can consider banking and PSU debt mf as safer investment options.

3. Investors Seeking Portfolio Diversification

Allocating a portion of the portfolio to top-performing banking and PSU debt funds can help mitigate risk and enhance overall portfolio stability.

4. Investors Who Prefer Quality Debentures and Liquidity

Those interested in investing in debentures with high credit quality and maintaining liquidity in their investment holdings find PSU debt funds suitable.

Advantages of PSU Debt funds

PSU debt funds offer a range of advantages for investors. Let’s go through the advantages:

1. Low Risk

PSU debt funds offer a low-risk investment avenue. This is due to their focus on high-quality debt instruments. Also, government-backed securities help in reducing the risk of default.

2. Stability

These funds prioritise stability and liquidity. This advantage makes them suitable for risk-averse investors. It is good if you are seeking consistent returns over time.

3. Government Backing

These funds are backed by the Indian government. This adds an extra layer of security and assurance for investors.

4. Reliable Returns

PSU debt funds typically offer relatively predictable and consistent returns over time. This makes them attractive options for risk-averse investors.

5. Tax efficiency

Gains from PSU debt funds are held for over three years. They are taxed at a rate of 20% with the benefit of inflation indexation. This results in tax-efficient returns for long-term investors.


Banking and PSU Debt Funds represent a valuable investment option for investors seeking stability, liquidity, and reasonable returns in the debt market. With a focus on high credit quality and government-backed securities, these funds offer low-risk opportunities for risk-averse investors.  If you are looking for a platform to invest in these funds, consider Dhan.