Banking and PSU debt funds are open-ended debt schemes that perform as an alternative to bank deposits. They invest in banks, bonds or debts of public financial institutions and public sector undertakings. This fund is best for a time horizon of 2-3 years. The borrowers are generally banks or government-backed sectors. This reduces the risk of non-payment and offers higher returns in comparison to bank deposits.
The average return of a banking and PSU debt fund is approximately 10.69% in the past one year. This fund invests in tools that have reasonably high liquidity and low average maturity. You can obtain the return in two ways, which is either the accrual income earned from debts and bonds under your scheme, which are the certificates of deposits of banks, or capital appreciation of properties during a falling interest rate condition and the fund manager sells these bonds to earn the profit. When the interest rates harden or become flat, these funds face risks as well. These usually ensure long term capital gains since they earn profits for a 3-4 year period at a time as well. 20% taxes are imposed on these funds along with indexation benefits. In any case, if you are going to redeem your investment before three years of the investment purchase date, the short-term capital gains will be summed up with the income and the tax imposed will be according to the income tax slab. Previously, banking and PSU debt funds were classified as a short-term or income fund. These funds have the highest credit quality since invested bonds or debts are owned by the Government. National Highways Authority of India, Rural Electrification Corp, Food Corporation of India, NTPC, Power Finance Corp, NABARD, etc are some of the popular PSUs in the fund portfolio. It is estimated that a banking and PSU debt fund can invest up to 20% of the total corpus in other investment tools. The scores of these funds are quite high, based on liquidity in the secondary market. As these funds are well traded, the fund managers buy and sell these bonds easily and get chances to capture pricing opportunities depending on the time horizon of the portfolio. Generally, the managers of the fund move between short term and long term maturity bonds by considering the fluctuations in the interest rates. When the rate of interest falls, the capital appreciation from these bonds is handsome. For the past few years, it has been noticed that the funds are yielding approximately 9% as returns. These returns are generally from the gilt funds and long term funds and investors benefit when interest rates are on the lower side. Most debt fund investors get attracted due to high credit quality, short to medium maturities and inherent high liquidity. It is quite thoughtful to park your money in these funds for a few years and earn handsome returns. A professional advisor can clear all your doubts and help you choose the best option for investment.
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