An efficient alternative for Fixed Deposits or Reccuring Deposits, PSU Debt funds are subject to debt market risks. They dont guarantee amount of return, it merely invests in bonds and other debt security assets which have set coupon rates (interest rates)
- DSP Banking & PSU Debt Fund allows investment as low as Rs. 500
- Axis Banking & PSU Debt Fund has lowest cost at 0.59%
Gradually India is moving to the low interest regime, while tax bracket for interest income (that is Rs. 10,000 per year) remains constant. It means, now your FDs will earn lesser returns, but you will still have to pay taxes as per your income bracket. The moment the interest earning hits ten thousand mark, you count your tax liabilities depending on tax bracket you fall in.
Can you save tax while keeping your money liquid?
PSU and Banking Debt funds doesnt fall under any tax deduction investment. This is not a section 80C investment, what I mean here is it can generate tax efficient returns.
Liquid Mutual Funds are often considered better alternative to savings accounts given its low cost structure, risk-free underlying asset. It also doesn’t charge any entry or exit loads and low cost structure. Heer in this post, I would take you to another set of debt mutual funds, a close cousin of Liquid fund, that is PSU and Banking Debt Fund, and a good alternative for Fixed deposits or Recurring deposits.
What is a PSU and Banking Debt fund?
PSU and Banking Debt Funds are funds which lends or invests in fixed income securities of high quality PSU companies or scheduled commercial Banks. It is an open ended fund, with SIP option. It is ideal for parking money between 6 months – 2 years horizon. The debt funds also has a low cost structure. The average cost is about 0.65% per year. It also doesn’t have any exit load, similar to liquid funds. There is no lock-in period for the funds.
What are the tax implications of Banking and PSU Funds?
The Taxation is similar to any debt fund. In short term, on withdrawal of less than 3 years, the income is added to the salary slab of the investor and taxed at the same rate. However, for long term, above 3 years, the tax rate would be lower of 10% or 20% with indexation benefit (adjusted to inflation).
The Top performing PSU and Banking Funds – As on Nov 10, 2019
|Scheme Name||AUM in Cr||3mnths||6mnths||YTD||1 yr||2 year CAGR||Exp ratio|
|HDFC Banking & PSU Debt Fund||3887||2.22||6.06||9.07||11.38||7.24||0.81%|
|IDFC Banking & PSU Debt Fund||11209||2.34||7.04||10.43||13.23||8.87||0.64%|
|Axis Banking & PSU Debt Fund||8803||2.36||6.53||9.81||12.3||9.03||0.59%|
|DSP Banking & PSU Debt Fund||2014||2.21||6.43||9.31||11.27||7.67||0.64%|
How to chose the funds?
I prefer MF debt schemes with 1000 crore+ AUM and minimum 5 years of performance history, it gives me a comfort on performance and liquidity. While investing in mutual fund, I prefer looking at consistency rather than highest returns.
HDFC Banking & PSU Debt Fund
It has 90% debt holding with 80% in low risk securities with 79 Debt Holding. The average duration of the debt maturity is 2.11 Years with yield to maturity 7.79%. AUM above 3 thousand crore is comfortable level, the redemption not likely to have impact on fund performance. The minimum one time purchase can be made at Rs. 5000, and minimum additional purchase can be made at Rs. 1000. SIP can be made with a minimum amount of Rs. 500
IDFC Banking and PSU Debt Fund
It has too many holding, rightly so as it holds above 10,000 crore AUM. No of Debt Holding 164, Average duration of holding 2.67 Years, Yield to Maturity 7.23%. 87.79% of fund assets invested in low risk PSU/ Bank bonds, 0.25% in Government of India security, and rest 3% are net receivables. An open ended fund, minimum one time investment is Rs. 5000 and Rs. 1000 additional, the minimum SIP amount is Rs. 1000.
Axis Banking & PSU Debt Fund
It has 102 debt holdings with holding duration about 2.10 years, Yield to Maturity at 7.11%
This fund has 93.28% investment in Debt 0.78% in – Government securities, 92.5% in funds invested in very low risk securities. This fund has better risk adjusted returns and offer low volatility. The minimum one time purchase can be made at Rs. 5000, and minimum additional purchase can be made at Rs. 1000. SIP can be made with a minimum amount of Rs. 1000
DSP Banking & PSU Debt Fund
Fund has 99.71% investment in Debt of which 1.93% in Government securities, 97.78% in funds invested in very low risk securities. No of Debt Holding 55, holding duration 2.75 Years and Yield to Maturity 7.07%. This fund has lowest entry point with minimum amount to invest – Rs. 500 for one time investment, additional investment and SIP.
The Banking and PSU debt funds can work better in time of low bank interest rates on fixed deposits. Banking and PSU Debt Fund, is an efficient alternative for Fixed Deposits. It can also be used for STP to other schemes of the Mutual Fund house. Debt funds are increasingly getting attractive as fixed income option.