Banking & PSU Debt Funds will not help you avoid credit problems!

Published on / By M. Pattabiraman Twitter: @pattufreefincal / 1 Comment

Published: July 18, 2019 at 10:51 am

Last Updated on December 29, 2021 at 1:00 pm

Are Banking & PSU Debt Funds a safe alternative for investors who wish to get higher returns than liquid funds and overnight funds? With so many credit defaults events in the debt mutual fund space, this a natural question to ask. Let us find out.

The first step is to ask, “what is a safe investment?”. Does this mean the NAV keeps increasing every day by pretty much the same amount and there are no sudden up or down movements? Or, does it mean, there is no vertical drop in NAV due to a change in a credit rating or an outright default? Or does it mean, the fund will provide a return close to what you expect in spite of daily fluctuations?

If those are your expectations from Banking & PSU Debt Funds or from any mutual fund for that matter, then you are likely to be disappointed. When it comes to investment risk, you can run, but you cannot hide.

What are Banking & PSU Debt Funds?

An open-ended debt scheme that predominantly (min 80%) invests in debt instruments of banks, Public Sector Undertakings, Public Financial Institutions. On the face of it, this seems like a narrow investment mandate. It is not.
Such debt funds can invest in bonds of any duration and therefore are typically subject to interest rate risk. This means that the NAV will react to the demand and supply of similar bonds in the market. There is no restriction on credit quality as well.
Investors assume such “banking and PSU fund” can only invest in AAA bond. In a la la land perhaps, not in the real world. Even if they invest only in AAA bonds, why are you so sure it will not become AA and why are you sure that the fund manager will/can sell such bonds and replace them with AAA bonds?
Such reactions can mean a significant up or down movement over the course of a few weeks of sideways movement over the course of months. This means that returns can fluctuate … a lot. If you are new to debt funds, you can download an e-book on understanding debt funds (pus six other free ebooks). Or in particular, check out: Understanding Interest Rate Risk in Debt Mutual Funds
Such funds will also react to oil price movements as mentioned in a May 2019 post. For example see:
Axis Banking & PSU Debt FundFor the remainder of this article, I shall give you exmaples of how banking and psu debt funds are not immune to credit problems. Take for exmaple this July 2017 Moodys report where they downgraded deposits of
(1) Bank of Baroda (BOB), (2) Bank of India (BOI), (3) Canara Bank (Canara), (4) Oriental Bank of Commerce (OBC), (5) Punjab National Bank (PNB), (6) Syndicate Bank (Syndicate) and (7) Union Bank of India (Union Bank)
So what you think would have happened to the NAV of funds that held bonds from these banks?

And who said PSUs cannot get into credit trouble? Uttar Pradesh Power Corporation bonds (2021) are AA rated. If a state PSU does not get a AAA, it could go down to A too at some point in time. Please recognise, you can lose money if AAA becomes AA. An outright default is not necessary.

Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)

🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
Let us take a peep into the current portfolio of funds in the banking and PSU category (source VR).

HDFC Banking and PSU Debt Fund (AUM ~ 3187 Crores): 17.45% of AA bonds, 11.63% A rated and below bonds (most of them banks as above). This fund got into credit trouble in Jan 2019 for holding bonds associated with IL&FS. These were special purpose vehicles which ironically are meant to shield the subsidiary from the parents financial troubles!

Franklin India Banking & PSU Debt Fund (AUM ~ 212 Crores): 21.4% AA bonds.

Kotak Banking and PSU Debt Fund (Oldest such fund? AUM 1790 Crores): 21.47 AA rated bonds.

I could go on, but it is boring. I hope the message is clear enough. You cannot escape from any kind of risk by choosing banking and PSU debt funds over other categories. The credit risk is perhaps a bit lower than corporate bond funds or credit risk funds but not low enough for you to sleep peacefully. Stop taking every newspaper headline seriously! Did deeper once and you will never read such news again.

Do share this article with your friends using the buttons below.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)