Last Updated on April 21, 2021 at 12:16 pm
Shushanth asks, “dear Pattu Sir, thank you for the recent articles about gilt mutual funds, but I think they are too volatile for me. Can I use banking and PSU funds instead of gilt funds for long-term goals?” The underlying assumption here seems that Banking and PSU debt funds are “safe” and less volatile than gilt funds.
The logic of clubbing bank bonds and PSU bonds in the same portfolio was probably because of a perceived notion of “safety”. Before the SEBI MF categorization rules, a few funds were exclusively investing in such bonds. Now the official definition of such fund is “open-ended debt schemes predominantly investing (80%) in debt instruments of banks, Public Sector Undertakings, Public Financial Institutions”.
Are Banking and PSU debt funds less volatile than gilt funds? Not really! The standard deviation of 17 banking and PSU funds ranges from 1.78% to 4.77% over the last three years. The corresponding number for 25 gilt funds (excluding 10Y constant maturity debt funds) range from 2.97% to 4.49%.
What does this mean? Banking and PSU bonds are also subject to duration risk or demand-supply risk, or interest rate risk and the typical quantum of NAV fluctuations are comparable to gilt funds.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! 🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
Banking and PSU funds are not as safe as gilt funds but are they “reasonably safe”? A look at the April 2021 Debt fund screener gives the following output:
| Scheme Name | AA / AA+ / AA- |
| ICICI Pru Banking & PSU Debt Fund | 19.16 |
| HDFC Banking and PSU Debt Fund | 16.81 |
| TRUSTMF Banking & PSU Debt Fund | 13.39 |
| Kotak Banking and PSU Debt Fund | 12.84 |
| Tata Banking & PSU Debt Fund | 9.57 |
| PGIM India Banking & PSU Debt Fund | 8.27 |
| SBI Banking and PSU Fund | 6.21 |
| Aditya Birla SL Banking & PSU Debt | 3.37 |
| L&T Banking and PSU Debt Fund | 3.13 |
| Franklin India Banking & PSU Debt Fund | 1.04 |
And there is a small default exposure too.
| Scheme Name | D |
| HDFC Banking and PSU Debt Fund | 0.04 |
| UTI Banking & PSU Debt Fund | 3.66 |
Even if you assume a less than AAA-rated PSU bond is not a problem, the govt will come to the rescue, you cannot say the same about banks, and it is not hard to find a AA rated bank bond.
So not only are banking and PSU bond funds just as volatile, the possibility of credit risk (changes in rating) and credit events (a default) is distinctly non-zero.
So are you getting lesser NAV fluctuation via Banking and PSU funds when compared to gilt funds? At the category level, this is not distinct enough. The reason for this is the average maturity period of the portfolio. As of March 2021, it ranges from 0.35 years to 8.75 years! Sadly the situation at the category level is the same for corporate bonds funds which should invest 80% of the portfolio in AA+ or higher rated bonds.
If you can spot a Banking and PSU fund that has a history of investing in short-term bonds (say not more than 3 years) and will continue to do so with high credit quality the yes, they are a reasonable substitute for gilt funds. This means investors should dig up past factsheets and not go by star ratings or past returns. This is why one should not ask which category would provide more returns. More returns = Lower Credit Quality.
If readers are interested, I can dig deeper, but this is no guarantee about the future! Today AMCs may be wary of credit events, but once the dust settles, they will start competing with each other for returns and guess how one gets a higher return in a Banking and PSU fund?!
I am not trying to suggest it is easier to select a gilt fund (more on this coming up). However, we expect their NAV to be volatile, and the possibility of a credit event is low if not zero.
In summary, if an investor wants a debt mutual fund for a long-term goal and understands the risk of choosing liquid funds or money market funds for this purpose should be ready to face both credit risk and duration risk (NAV volatility). Since NAV volatility is a certainty, choosing gilt funds at the very least reduces the chances of credit risk.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1,000 investors and advisors use this!
New Tool! => 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.
- 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 over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
About The Author
Dr 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!
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
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published 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
This 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
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)