Understanding Banking & PSU Debt Funds
Banking and PSU Debt Funds are the sub-category introduced by the Securities and Exchange Board of India (SEBI) in the debt Mutual Fund category. These open-ended funds invest at least 80% of their net assets^ in debt instruments of banks, Public Sector Undertakings, Public Financial Institution and Municipal Bonds.
^ Excluding net assets component that is mandatorily required to be invested in liquid assets.
These funds aim to provide liquidity, has a low risk and volatility profile while seeking for reasonable returns. Banking and PSU Debt Funds invest in the debt instruments say bonds and debentures usually of high credit quality or AAA-Rated category with the focus being on credit quality with Short to Medium Term Maturities.
Therefore, the risk of default is very low in case of sovereign instruments as they are supported by the government. Fund managers mainly target the companies categorized as “Maharatna” and “Navratna” companies to build the portfolio, as they have a history of yielding substantial gains.
How are Banking & PSU Funds taxed?
If the mutual fund units are sold after 3 years from the date of investment, gains are taxed at the rate of 20% after providing the benefit of inflation indexation. If the mutual fund units are sold within 3 years from the date of investment, entire amount of gain is added to the investors' income and taxed according to the applicable slab rate. No tax is to be paid as long as you continue to hold the units.
Dividends are added to the income of the investors and taxed according to their respective tax slabs. If an investor's dividend income exceeds Rs 5,000 in a financial year, the fund house also deducts a TDS of 10% before distributing the dividend.
Who are these funds suitable for?
- They are suitable for a short investment horizon of more than 3 months for the fixed-income allocation in your longer-term portfolio
- Risk-averse investors looking for an investment option with minimal risk can opt for a banking and PSU debt fund
- Investors can choose to allocate a part of the portfolio to some of the best banking and PSU debt fund, as it helps to mitigates the risk factor considerably
- Investors looking for an option to bank deposits that aim to generate higher returns (also carries a slightly higher risk than bank deposits) should consider investing in these funds
- Investors wanting to invest in debentures of high credit quality and for liquidity are ideal for these funds
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