Banking and PSU debt funds march on amid trust deficit in fixed income schemes

The category appears on the top of charts: a ‘Banking and PSU Debt’ fund has minimum 80% of assets in banking and PSU issuers but a close look at portfolio maturity and credit quality is warranted

Kumar Shankar Roy May 28, 2020

debt funds loan exposure to Yes Bank promoter entitiesDebt mutual funds which took excessive credit risk have caused heart-burn for investors. Downgrades, heavy redemptions and side pockets have hit the confidence of investors. But in these trying times, there are a few pockets offering resistance. Banking and PSU debt fund – even amid a trust deficit for debt funds in general – have seen growth in assets from Rs 70,000 crore end of 2019 to nearly Rs 80,000 crore today. In terms of performance, Banking and PSU Debt funds are just behind toppers Gilt and Long Duration funds.

In 1 year time period, Banking and PSU Debt funds have given between 7.2% to 15.2% return, ie an average of 10.8%. Obviously, 2-year and 3-year numbers also appear good given the 1-year effect. Such numbers have generated quite a buzz. Things always look good when numbers are up. But, that’s where the risk is. In this article, we will look at Banking and PSU Debt funds with a microscope and tell you what all you need to know before you invest in them such as suitability, volatility, returns, risks etc. Read on.

What are banking & PSU debt funds

Banking and PSU Debt Funds are open ended debt schemes that predominantly invest in debt instruments of Banks, Public Sector Undertakings & Public Financial Institutions (PFIs). There are 19 funds in this category.

As per Sebi norms, a Banking and PSU Debt Fund has to have a minimum 80% of total assets invested in debt instruments of banks, Public Sector Undertakings, Public Financial Institutions. There is no sub-limit for each type of issuer.

The rest 20% is where attention should be given. Typically, the funds the rest 20% money in NBFC, HFC, PTC, Central and State govt. bonds, etc.

The three largest funds in this category are IDFC Banking & PSU Debt Fund, Axis Banking & PSU Debt Fund and ABSL Banking & PSU Debt Fund.

Suitable for which timeframe

These debt funds are not for short term money parking. A Banking and PSU Debt Fund is ideal for a time horizon of 2-3 years or more.

A Banking and PSU Debt Fund is not supposed to take much credit risk. Then, why such a time frame? Many Banking and PSU Debt Funds run a rolled-down strategy in debt. In simple terms, a rolled-down strategy is where the fund buys a three-year or a four-year debt paper, and simply holds those assets till maturity. So, at maturity which is three years or four years away, you do not have any duration risk in the portfolio at all. If all the portfolio constituents are well-run banks and PSUs with implicit/explicit sovereign guarantee, then credit risk also virtually becomes zero.

Volatility check

Every Banking and PSU Debt Fund aims to strike the most optimal balance between yield, safety and liquidity. However, this ‘balance’ is a subjective matter. Your job as an investor is to avoid volatility.

As bond prices increase, bond yields fall. Falling interest interest rates make bond prices rise and bond yields fall. Interest rates in India have fallen for sometime now. If things change in the opposite direction, there may be volatility.

Standard deviation is used more often than any other metric to gauge a fund’s risk. Standard deviation quantifies how much a series of numbers, such as fund returns, varies around its mean, or average. Investors can use standard deviation because it provides a precise measure of how varied a fund’s returns have been over a particular time frame both on the upside and the downside. In the case of Banking and PSU Debt Funds, we saw standard deviation ranging from 1.4 to 4.6.

The fund with highest standard deviation ie UTI Banking & PSU Debt Fund (4.65) has seen pretty shocking performance last year, when it lost 4.6% in one quarter’s time.

Fund difference

We took a quick look at Banking and PSU Debt funds and found that there are some things where funds vary.

One key factor of differentiation is average maturity of fund portfolios. Average maturity is expressed in number of years. The higher the average maturity, the more is the portfolio sensitive to interest rate changes. Why? Because interest rates are more likely to change during a longer horizon. The more time the portfolio takes to mature, the more time the portfolio is exposed to interest rate changes.

At present, the average maturity in Banking and PSU Debt funds varies between 4 months to 9 years. That is quite a spectrum. The funds with very high average maturity are filled with more long-dated paper. We saw a few smaller-sized Banking and PSU Debt funds having more than average maturity like Invesco India Banking & PSU Debt Fund (9.17 years), Edelweiss Banking and PSU Debt Fund (8.84 years). A majority of category peers had average maturity between 2 years and 5 years.

Axis Banking & PSU Debt Fund has an average maturity of 2.2 years. Currently the fund is completely invested in AAA securities within the 2-3-year maturity bucket. The fund says it will continue to invest in residual maturity bonds within this maturity bucket to take advantage of the accrual opportunities in this space.

Tata Banking and PSU Debt Fund has an average maturity of 4.16 years. The fund says its portfolio is biased towards medium term securities with ~73%
of the portfolio maturing in 3-7 years.

Do note that if a fund portfolio’s average maturity is upped (typically over 5 years), then return or risk from duration is substantial.


Return %



1 yr

2 yrs

3 yrs

Avg. Maturity(in yrs)

Yield To Maturity (%)

Aditya Birla SL Banking & PSU Debt






Axis Banking & PSU Debt






DSP Banking & PSU Debt Fund






Edelweiss Banking and PSU Debt






Franklin India Banking & PSU Debt






HDFC Banking and PSU Debt






ICICI Pru Banking & PSU Debt






IDFC Banking & PSU Debt






Kotak Banking and PSU Debt






LIC MF Banking & PSU Debt






SBI Banking and PSU Debt






Sundaram Banking & PSU Debt






Portfolio quality

The category average of Banking and PSU Debt Funds AAA-rated exposure is about 81%, Sovereign is 7.6% and Cash Equivalents is 9.3%. So, at a quick glance, the portfolios of all Banking and PSU Debt funds will have AAA-rated nature. However, it is important to look deeper.

The 20% window in Banking & PSU Debt funds (the rest 80% is as per Sebi norms) may carry some credit risk since it can be used by the fund to generate high returns and so higher risk. The larger the number of securities in a portfolio, the greater the amount of attention is warranted when looking at issuers.

There is no formula like smaller funds take more risk etc. If you are interested in a Banking and PSU Debt fund, you have to look at its portfolio to see where exactly the money is invested.

Holdings related to SIDBI, NABARD, FCI, IRFC, PGCIL, NTPC, PGCIL, REC, HUDCO, NHAI are quite common. Also, exposure to HDFC Bank, HDFC, Axis Bank, ICICI Bank, Canara Bank, Bank of Baroda, SBI was seen.

Corporate debt from private sector NBFCs (Muthoot Finance) or Housing Finance Companies or smaller banks (RBL) may give higher yield to a portfolio, but they carry higher risks. Concern remains high over NBFCs / HFCs with higher yielding real estate exposures.

The Yes Bank AT1 bonds has showed that even perpetual AT1 bonds are not really 100% safe. Also, some funds we saw hold bonds of infrastructure related entities (like highway operators).


Given the safety, liquidity and return framework for debt funds, we prefer certain funds more than others.

We like the way IDFC Banking & PSU Debt Fund, Axis Banking & PSU Debt Fund, SBI Banking & PSU Debt Fund, LIC MF Banking & PSU Debt Fund, and Edelweiss Banking & PSU Debt Fund are managed.

However, we are not comfortable with the below AAA rated exposure in funds like  UTI Banking & PSU Debt Fund and L&T Banking & PSU Debt Fund. 

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at

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