A well-balanced debt portfolio demands a safe and a decent return generating investment option for the core allocation. There are two options in the debt universe that fit the requirement — corporate bond fund and banking and PSU fund.
Both the funds invest in top-rated debt papers with low-to-medium term maturity and hence they come with low interest and credit risk.
"If the investment time horizon is not too short then banking and PSU fund is an idle option for core debt allocation," says debt guru Joydeep Sen.
When should investors look at banking and PSU funds?
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-secs.
As a result, the investment option comes with several advantages including low risk (as it invests predominantly in papers of highly regulated or government controlled institutions), healthy returns (in the last 3 years, the fund category has delivered annual return of 8.4% according to data from Value Research), and high liquidity (due to investment in top-rated papers).
"Banking and PSU fund is all about good portfolio and high credit quality. If that's the requirement of the investor, then they should consider the option," Sen said.
Moreover, banking and PSU fund is the ideal option for medium-term goals.
What is the difference between corporate bond fund and banking & PSU fund?
Both the funds are similar in terms of return, credit risk and maturity. What differentiates the two is regulations.
"There is one major difference in regulation. For corporate bond funds, it's compulsory to have 80% or more money in AAA and AA+. For Banking and PSU funds, there is no such regulation," Sen said.
However, despite the absence of regulation, banking and PSU funds refrain from investing large portions in lower-rated papers.
How to identify the best fund for your client?
As stated above, banking and PSU funds are not bound by regulations to invest only in high-rated papers. So, there is always a chance that a fund manager might have taken exposure to lower-rated papers.
As a result, you should look at the portfolio of available funds to ensure that your clients do not get exposed to unwanted risks.
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