Banking & PSU Funds – A good alternative for bank FDs?

If you are depending on any one asset class for income generation, do bear in mind that diversification is the key for long term wealth creation. It is less likely for asset classes to perform / underperform in tandem all the same time. Diversify your investment portfolio based on your risk appetite to ensure that the risk factor is spread across various asset classes. This way, if one asset underperforms, investments in other asset classes can even out losses. Mutual funds like equity schemes have a high risk returns tradeoff. However, there are other mutual funds like debt schemes as well that suit investors with moderate or low risk appetite.

Debt mutual funds offer active risk management by investing in a diversified portfolio of fixed income securities and money market instruments. These are mutual fund schemes that aim at generating steady income over the short term. Debt funds generally invest in securities which come with a short maturity period. Depending on the scheme’s asset allocation strategy, a debt fund manager might build the investment portfolio by choosing money market instruments like commercial papers, cash and cash equivalent, company fixed deposits, call money, certificate of deposits, etc.

Investors who are looking for an alternative to low interest rate offering bank fixed deposits, such individuals can consider investing in banking and PSU funds.

What is a banking and PSU fund?

A banking and PSU fund invests a minimum of 80 percent of its total corpus inPSUs (Public Sector Undertakings)debentures, bonds, and certificates of deposit of banks. The investment objective of banking and PSU funds is to generate capital appreciation by investing in securities that come with a maturity of one year or below. Banking and PSU funds offer high liquidity, thus allowing investors to buy or sell their fund units as per their income needs. Investors who are switching from conservative schemes or those are risk averse, such individuals can consider investing in banking and PSU funds.

Why are banking and PSU funds better than bank FDs?

Earlier, bank FDs would offer decent interest rates. Indian investors even today invest majority of their hard in money in bank FDs. However, the fixed interest rates on offer have gone down to a shaming 4 – 5 percent these days. Investors with a long term investment horizon generally invest to create long term wealth. But with such low interest rates, it has become almost impossible for individuals to target their life’s financial goals by solely investing in bank FDs. Banking and PSU funds on the other hand may not guarantee fixed returns, but they are known to offer better returns than bank FDs. Banking and PSU funds have generated returns up to 10.50% in the past. This is almost double than what bank FDs are offering currently. Also, these are a low risk investment which are ideal for individuals who are looking to part their money for the short term.

SIP vs Lumpsum. How should you invest?

Investors can either start a monthly SIP or make a one time lumpsum investment in a banking and PSU fund. A lumpsum investment is considered by individuals who have surplus money sitting idle and wish to put it to better use. Systematic Investment Plan on the other hand is an investment process where you invest small fixed amounts at periodic intervals in a mutual fund scheme of your choice. Investors can also refer to SIP calculator, a free online tool that helps them determine how much money they need to invest in order to get closer to their desired target.

Retail investors are expected to talk to their financial advisor before investing.