Banking and PSU Debt Fund, as a newly introduced category, is the earlier category of short term or income funds. This fund is a mixture of bonds and debts issued by financial institutions. As the government of India owns the bonds or debts of maximum PSUs or Public Sector Undertakings Debt Fund, it yields the highest credit rating. A few of the famous PSUs in the fund portfolio include the National Highways Authority of India, Rural Electrification Corp, NTPC and many others. 20% of the portfolio can be invested in other instruments by banking and PSU debt funds. These funds generate long term capital in a short period through debts.
Banking and PSU debt funds have bonds and debt funds which boast of high liquidity in the secondary market. This investment is safe and secure and to some extent, offers assured returns. These funds have lower risks with a higher return quotient. The government is the owner of the same and accountability forms the primary benefit. If the balance sheet has mismatches in any case, the Government will account for repayments. Any form of bad debt will be repaid by the government to achieve a benchmark and to draw other investors. Another benefit of this fund is diversification of the portfolio which not only lets investors enjoy the varying rates for a different interval of time but also helps in reducing the level of risk. These funds yield a high aspect of liquidity, offering returns efficiently and in a convenient manner. These funds are generally invested in AAA-rated category sectors and therefore, have high credit quality. They have low average maturity. The PSU bonds they hold are generally liquid, medium-term debts of companies like REC, PFC, NABARD and a few more. These are well traded and the fund managers can sell them easily to gain chances of capital appreciation during a fall in the rates. If the investor sells the units after 1 year from the investment date and the gain is less than Rs 1 lakh, then they will be tax-free and if the gain is over Rs 1 lakh, then the tax rate is 10%. If the investor sells the unit within 1 year, then 15% tax is levied on the entire amount in gains. If you continue holding the units, no tax is required to be paid. This was the scenario for capital gains. The mutual fund scheme pays a dividend at a 10% rate of taxation. This is called Dividend Distribution Tax or DDT. This tax is not paid directly by the investor, the amount is curtailed from the dividend amount before being paid to the investor. Banking and PSU debt funds perform poorly whenever there is a case of flat interest rates. As they have been newly introduced, track records of performance are not widely available. The yearly return has been estimated at 8.6-8.95% which is comparatively higher than other conventional options.
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