Banking & PSU debt mutual funds: Good returns combined with safety

Debt fund investors usually seek slightly better returns than bank fixed deposits for their immediate needs. However, if this higher return comes at the cost of safety of capital, then it makes no sense. Recently too many bad apples have emerged among debt funds, souring the experience for investors.
Even funds from supposedly safer categories like liquid and ultra-short term have taken a hit. However, one category of debt funds has quietly emerged as a safe hiding place. So are banking & PSU funds the answer to investor woes? Standing tall These funds were introduced as a separate category last year during the fund classification exercise. However, many of the existing funds in this space have been around for longer. Earlier classified as short-term or income funds, these were rechristened as banking & PSU funds. As the name suggests, these funds mostly invest in a mix of bonds or debentures issued by banking firms and public sector enterprises including public financial institutions. The portfolio is, therefore, inherently made of the highest credit quality. Bonds or debentures of most PSUs boast the highest credit rating as these are owned by the government of India and enjoy quasi-sovereign status as borrowers.