The name says it all, Banking and PSU Debt funds have the portfolio of 4:1 ratio wherein 80% of the corpus is invested in debentures, bonds and certificates of deposit of banks and PSUs. The rest 20% is invested into corporate bonds and government securities.
In the debt fund peripheral, one and only option that is as well-rounded is the Banking and PSU Debt fund. They are delivering healthy returns without conceiving in any risky papers. Both the interest rate & risk are low as the investment is thoroughly in papers with maturity of 1 to 3 years. Let’s look upon the advantages of these funds.
1. Negligible risk
Banking and PSU Debt funds invests in the entities that are highly or wholly regulated & controlled by the government such as in banks, PSUs and public financial institutions. Consequently, the level of defaulting by such entities becomes least for debt obligations. Hence, they don’t carry credit risk. The low average maturity lowers the interest rate risk too.
Though the SEBI has not specified the maximum holding duration but generally funds are held for the range of 1-4 years.
2. Robust returns
The returns delivered is on the higher side in the debt category. Research shows that the fund category has delivered 8.36% (average) returns in the last 3 years.
3. Easy liquidity
The funds are highly liquid as investments are made in high rated certificates. The liquidity enhances fund managers to grasp capital appreciation opportunities when rates decline due to volatility. Notably, the fund managers are flexible to shift investments from low duration to high duration bonds and reversed.
4. All seasoned
The all-rounded character of Banking and PSU debt funds makes them an ideal option for every investor with medium term goals especially in the debt portfolio.
Yield to maturity (YTM) is the major criteria to look upon before investing as high YTM means the fund is investing in low-risk entities. Note that the funds with low quality papers should be avoided.