Banking & PSU Fund

When a conservative investor wants better-than-FD potential without taking on shaky borrowers, the Banking & PSU fund is often the first stop. Under SEBI's debt-fund categorisation, this scheme must park at least 80% of its assets in debt instruments issued by banks, public sector undertakings (PSUs) and public financial institutions.

Why the 80% rule matters

The issuers here are mostly large, well-rated names, public sector banks, NTPC, Power Finance Corporation, REC and the like, many carrying AAA ratings and an implicit comfort of government backing. That tilts the portfolio toward high credit quality, so the default risk is meaningfully lower than in credit-risk funds that chase yield from weaker companies. The remaining 20% typically goes into top-rated NBFCs, housing finance companies or similar paper.

This category became popular after the IL&FS and DHFL episodes shook faith in lower-rated debt funds. Investors rediscovered the appeal of lending mainly to entities that are hard to imagine defaulting.

What to actually expect

Low credit risk does not mean no risk. These funds still carry interest-rate risk: when the RBI raises rates or bond yields climb, NAVs can dip, and the longer the portfolio's duration, the sharper the swing. With the repo rate at 5.25% and the 10-year G-Sec hovering around 7% in mid-2026, returns here are steady rather than spectacular.

Taxation now follows the standard debt-fund rule. For investments made after April 2023, gains are added to your income and taxed at your slab rate, with no long-term indexation benefit. That has narrowed the edge over fixed deposits for high earners, so the decision is more about liquidity and convenience than tax arbitrage.

My view: a Banking & PSU fund suits an investor with a two-to-three-year horizon who wants relative safety and easy access to money, parking an emergency corpus or short-term goal funds. Check the average maturity before buying: a shorter-duration fund will feel calmer if rates move against you. It is a sensible core holding for the debt side of a portfolio, not a return-chasing bet.