In the debt fund space, there's hardly any other option that is as well-rounded as the Banking and PSU Debt fund. The nature of these funds is such that they are able to deliver healthy returns without buying any risky papers. Even the interest rate risk is low as they ideally invest in papers with maturity of one to four years.
As the name suggests, Banking and PSU Debt funds invest about 80% of the corpus in debentures, bonds and certificates of deposit of banks and PSUs. The rest of corpus goes into corporate bonds and g-sec.
The investment pattern leads to several advantages for the fund category. Let's look at them one by one.
1. Low risk
Banking and PSU Debt funds predominantly invest in banks, PSUs and public financial institutions. All of these entities are either highly regulated or controlled by the government. As a result, there's a very low chance of these entities defaulting on their debt obligations. Hence, they do not pose much credit risk.
The interest rate risk too is on the lower side, thanks to the low average maturity. Even though SEBI has not specified the maximum duration of papers they can hold, most Banking and PSU Debt funds do not buy long duration instruments. The maturity of papers held by most funds is in the range of 1-4 years.
2. Healthy returns
The returns delivered by Banking and PSU Debt funds is on the higher range in the debt category. Data from Value Research shows that the fund category delivered 8.36% returns in the last three years.
3. High liquidity
Banking and PSU debt funds are highly liquid as they invest in top-rated instruments. The liquidity also allows fund managers to make use of capital appreciation opportunities when rates fall.
Further, the fund managers of Banking and PSU debt funds are not bound by duration. This allows them the flexibility to shift investments from low duration to high duration bonds and vice versa. This flexibility helps managers to minimize interest rate risk in times of volatility.
Fits into every portfolio
The well-rounded nature of Banking and PSU debt funds makes them an ideal option for every investor. Investors with medium term goals should consider Banking and PSU debt funds as an option. Moreover, these funds should be the preferred medium duration investments in the debt portfolio.
How to identify the best fund for your client?
Yield to maturity (YTM) is one of the criteria. But one should not pay too much importance to it as high YTM means the fund is lending to low-risk entities. Funds with low quality papers should be avoided.
MFDs should also look at the credentials of the fund house and the fund manager along with the costs involved.
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