Banking And PSU Funds – Overview + FAQs!

Rather than depositing your money in a bank, considering a banking & PSU fund might yield more satisfying returns than traditional bank deposits.

In this dedicated guide on ‘banking and PSU funds’, we will discuss the features and various aspects to help you decide if they are a good alternative to bank deposits. Let’s dive in!

What Are Banking & PSU Funds?

Banking And PSU funds are debt funds that primarily invest at least 80% of the assets in debt instruments issued by banking institutions and government-owned or government-controlled companies, often PSUs (Public Sector Undertakings).

These funds invest in high-quality borrowers and, hence, carry low risk. The low-risk profile and the perceived safety of investments in these funds make them popular among investors, especially those seeking stable returns and capital preservation.

[Related: Debt Funds & Their Types]

Best Performing Banking & PSU Funds

Based on past 5-year performance, here is a short list of the best banking and PSU funds. Note- this list does not consist of any recommendation or financial advice.

Fund Name3-Year CAGR5-Year CAGR
Kotak Banking & PSU Debt Fund5.22%7.74%
HDFC Banking and PSU Debt Fund5.10%7.60%
ICICI Prudential Banking and PSU Debt Fund5.78%7.59%
Aditya BSL Banking & PSU Debt Fund5.07%7.50%
PGIM India Banking and PSU Debt Fund5.02%7.43%
Last Updated: October 2023

Advantages & Features

Like each category of debt funds, these funds also offer some advantages and distinct features. Let’s discuss.

1. Asset Allocation

These funds typically allocate at least 80% of their assets to debt instruments issued by banking institutions and PSUs. The rest of the assets can be invested in other fixed-income instruments to optimize returns.

[ Also Know About – GILT Funds | Corporate Bond Funds ]

2. Relatively Low Risk

As these funds invest in debt instruments with high credit ratings, they carry lower risk compared to many other debt-oriented mutual funds. The creditworthiness and stability of the issuers are rated by top credit rating agencies in the country.

3. Stable Returns

Usually banking institutions and PSUs are less likely to default on their payments due to credibility issues. This causes the investments to work effectively and generate stable returns. The historical average returns offered by banking and PSU funds range from 7% to 10%.

4. Good Liquidity

Another awesome feature of these funds is their liquidity. You can earn similar returns to fixed deposits without compromising on liquidity. Banking and PSU funds let you access your capital as or when needed.


Considering the associated disadvantages of any investment helps us make informed decisions. Let’s look at the drawbacks of banking & PSU funds.

A. Not ideal for long-term: Banking and PSU funds are considered ideal for investors with a short to medium-term investment horizon. Here is why;

  1. These funds are sensitive to interest rate changes. Interest rate fluctuations in the long term can have a significant impact on returns.
  2. These funds aim to offer good liquidity, capital preservation and predictable returns making them appropriate for short to medium-term investments.

B. Lower returns than equity funds: In the investment world, lower risk often corresponds to lower returns. Owing to their low-risk factors, these funds offer lower returns than equity-oriented funds that carry a higher degree of risk.

Important Points To Consider

When contemplating investments in Banking and PSU funds, it’s crucial to keep these factors in mind:

  1. Consider your financial goals, plans and investment horizon.
  2. Compare different funds against the benchmark.
  3. Pay attention to the past performances of funds.
  4. Be aware of the expense ratio and exit loads.
  5. It may be prudent to steer clear of newly launched schemes.

[ This May Help: How To Choose A Mutual Fund ]

Final Words

The content provided is for informational purposes and readers should consult with a financial advisor or conduct their own research before making investment decisions.


  1. Can I do SIPs in banking and PSU funds?

    Yes, most mutual funds offer SIP investment mode to investors.

  2. How are banking and PSU funds taxed?

    These funds are taxed similarly to other types of debt funds. As per recent changes, debt funds are now taxed under the applicable income tax slab.

  3. How to invest in banking and PSU funds?

    Here are the steps:
    1. Open an investment account with a reputed AMC or an online investment platform
    2. Complete your KYC
    3. Research and select a banking and PSU funds
    4. Decide your investment amount & mode of investment
    5. Make the payment

A commerce graduate turned a digital creator to follow his passion for writing and sharing useful & well-researched information that adds some value to people's lives.

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