Investing PSU fund thematic mutual fund

PSU mutual fund (Public Sector Undertaking equity scheme)

From WebNotes, a public knowledge base. Last updated 19 June 2026. Reading time ~7 min.

Key facts

Category	Thematic equity scheme under SEBI's sectoral and thematic classification (October 2017 circular)
Minimum theme exposure	At least 80 per cent of assets in PSU stocks per the thematic-scheme rule
Taxation	Equity-oriented: 12.5% LTCG above Rs 1.25 lakh, 20% STCG
Best use	Satellite tactical allocation (5 to 10 per cent of equity), not a core holding

A PSU mutual fund is a thematic equity scheme that invests primarily in Public Sector Undertaking (PSU) stocks, the listed companies in which the Government of India or a state government holds a controlling stake. The category sits within the SEBI sectoral and thematic framework set by the October 2017 categorisation circular, and as a thematic scheme each fund must keep at least 80 per cent of its assets in PSU equity. PSU funds drew heavy retail interest through 2023 and 2024 after a sharp run in Indian public-sector stocks across energy, defence, banking, and infrastructure.

A PSU fund is a single-theme product. It does not spread risk across the whole market the way a flexi-cap or large-cap fund does; it bets that government-owned companies as a group will do well. That makes it a satellite holding, useful as a tactical overlay of 5 to 10 per cent of an equity portfolio rather than a core allocation. The manager’s job is to pick which PSUs to own and how much, within a universe that is narrow by design.

For Indian retail investors, a PSU mutual fund offers active management inside the PSU universe, diversification across PSU sub-sectors (energy, banking, defence, infrastructure), the chance for stock-selection alpha within the theme, and a clean way to take a single tactical view on the public-sector trade without buying individual government stocks.

What counts as a PSU

A Public Sector Undertaking is a company in which the central or a state government holds more than half the paid-up share capital, directly or through other government bodies. Central PSUs (CPSEs) such as ONGC, NTPC, Coal India, and SBI are the most familiar. State PSUs and PSU banks recapitalised by the government also qualify. SEBI does not publish a fixed PSU list for fund use; the AMC defines the eligible universe in the scheme information document, typically anchored to a published index such as the Nifty PSE or Nifty CPSE, plus other government-majority listed companies.

Two boundary cases matter for an investor reading a PSU fund portfolio. First, a company can drift out of the PSU definition after disinvestment: once the government stake falls below the controlling threshold, the company is no longer a PSU, and the fund must exit or the holding stops counting toward the 80 per cent theme floor. Second, some funds also hold PSU-adjacent names where the government is a large but not majority shareholder; the scheme document spells out how the AMC treats these.

Major PSU funds

SBI PSU Fund: One of the largest in the category.
ICICI Prudential PSU Equity Fund.
Aditya Birla Sun Life PSU Equity Fund.
Invesco India PSU Equity Fund.
HDFC PSU Equity Fund.

The category AUM has grown materially through the 2023-2024 PSU rally period.

Comparison with PSU ETFs

Dimension	PSU Mutual Fund	CPSE ETF	Bharat 22 ETF
Management	Active	Passive (Nifty CPSE)	Passive (Bharat 22 Index)
Universe	Broader PSU + PSE	~11 specific CPSEs	22 specific entities
Manager flexibility	Active stock selection	None	None
TER	1.5-2.0%	~0.05%	~0.05%
Sectoral coverage	Variable	Energy-heavy	More diversified
Suitable for	Active PSU exposure	Specific CPSE basket	Diversified disinvestment basket

PSU mutual funds offer broader and more actively-managed PSU exposure than the government-promoted ETFs.

PSU stock universe

PSU funds typically invest across:

Energy: ONGC, NTPC, IOC, GAIL, Coal India, Power Grid, NLC.
Banking: SBI, PNB, Bank of Baroda, Union Bank, Canara Bank.
Infrastructure: NHAI bonds (debt), NBCC.
Defence: HAL, BEL, Bharat Dynamics.
Finance and insurance: LIC, REC, PFC, IRFC, IRCTC.
Other PSUs: BHEL, Hindustan Aeronautics, Container Corporation, etc.

The defence and infrastructure sub-segments have shown particularly strong performance in 2023-2024.

The disinvestment theme

Government disinvestment sits at the centre of the PSU investment case. When the Government of India sells part of its stake in a PSU, through an offer for sale, a strategic sale, or a follow-on issue, it raises budget revenue and, in the process, increases the stock’s free float and broadens its shareholder base. The disinvestment programme runs through the Department of Investment and Public Asset Management (DIPAM), which sets the annual target in the Union Budget.

For a PSU fund this theme cuts two ways. A credible disinvestment push can re-rate a PSU upward, because a higher free float and a clearer path to private-style governance attract institutional buyers. A strategic sale, the outright transfer of management control to a private buyer, can unlock value that the market never priced into a government-run company. The privatisation of Air India and the proposed strategic sales of other entities are the reference points investors watch. The flip side is supply: a large offer for sale puts fresh stock into the market at a discount, which can cap near-term price gains even when the long-term case improves.

The two government-promoted exchange-traded funds, the CPSE ETF and the Bharat 22 ETF , were themselves built as disinvestment instruments. They let the government sell stakes in a basket of PSUs to retail and institutional investors in one go. A PSU mutual fund is not a disinvestment vehicle in that sense; it is an actively managed scheme that takes a view on the same universe and can move between names as the disinvestment calendar plays out.

PSU debt and hybrid variants

The PSU label also appears outside pure equity. A PSU and PSU bank debt fund is a separate SEBI debt category that invests at least 80 per cent of assets in debt issued by PSUs, public financial institutions, and PSU banks. These are fixed-income products bought for the relative safety of quasi-sovereign issuers such as REC, PFC, NABARD, and IRFC, not for the equity-style upside of a PSU equity scheme. An investor searching for a “PSU fund” should be clear which of the two they mean: the equity theme covered here, or the debt category, which carries debt mutual fund taxation at slab rate rather than equity treatment.

A handful of schemes blend the two, holding both PSU equity and PSU debt, but these are uncommon. The mainstream PSU equity fund stays almost fully in PSU stocks to retain its equity-oriented tax status.

Recent performance context

The Indian PSU rally through 2023-2024:

Energy PSUs: Strong on oil and gas pricing cycles.
Defence PSUs: Beneficiaries of Indian defence-spending growth and “Make in India” initiatives.
Infrastructure PSUs: Beneficiaries of capex and infrastructure spending.
Banking PSUs: Beneficiaries of NPA cleanup and credit cycle.

PSU mutual funds have delivered material outperformance over the broader equity market during this rally.

Risks

Sectoral concentration

PSU funds carry:

Sectoral concentration risk: Heavy energy and banking exposure.
Political risk: Government policy changes affecting PSUs.
Operational efficiency concerns: Some PSUs face structural underperformance issues.

Cyclical nature

PSU performance is often cyclical:

Periods of strong outperformance.
Periods of long underperformance versus private-sector peers.

Tax treatment

PSU mutual funds are equity-oriented :

LTCG (>12 months): 12.5 per cent above Rs 1.25 lakh annual exemption under Section 112A .
STCG (≤12 months): 20 per cent under Section 111A .

Role in portfolios

Tactical positioning

PSU funds suit:

Tactical PSU rally exposure: During favourable PSU cycles.
Sectoral overlay: 5-10 per cent allocation in equity portfolio for tactical exposure.
Government-disinvestment-cycle plays: When government accelerates disinvestment.

Long-term considerations

For long-term core allocation, PSU funds are typically less suitable than broad-market funds due to sectoral concentration risk. They work best as satellite tactical allocations.

Cost and expense ratio

Active PSU funds carry a total expense ratio in the range of 1.5 to 2.0 per cent for the regular plan, well above the roughly 0.05 per cent charged by the passive CPSE and Bharat 22 ETFs. The direct plan of a PSU fund cuts that by the distributor commission, typically 0.7 to 1.0 percentage points, so a direct PSU fund runs closer to 0.8 to 1.2 per cent. Over a multi-year tactical hold the fee gap against the ETFs is real money, and it is the price paid for active stock selection within the theme. An investor who only wants the PSU basket, without a manager’s calls, is often better served by the cheaper ETF.

How to evaluate a PSU fund

Because every PSU fund draws from the same narrow universe, scheme-to-scheme differences come from a few specific choices rather than broad style:

Sector tilt within PSUs. Check whether the portfolio leans into energy and banking (the heavyweights) or holds a larger defence and capital-goods position. The tilt drives most of the return difference between PSU funds in any given period.
Concentration. A fund with a top-10 holding above 60 per cent of assets is taking sharper single-stock risk than a more spread portfolio. Read the latest monthly factsheet.
Free float and liquidity. Some PSUs trade thinly because the government still owns most of the stock. A large fund may struggle to build or exit a position in a low-float name without moving the price.
Track record across a full cycle. PSU stocks swing through long periods of underperformance followed by sharp rallies. A fund that only has a recent record was launched or grew into the up-cycle, which flatters its numbers. Look for behaviour in a weak PSU phase.
AUM and flows. Rapid asset growth during a rally can force a manager to buy at elevated prices, while heavy redemptions in a downturn can force selling into weakness.

A PSU fund earns its place when an investor holds a deliberate, time-bound view that government-owned companies will outperform, has the risk appetite for a concentrated single-theme bet, and is willing to exit when the cycle turns. As a permanent portfolio fixture it adds concentration risk without a matching long-run return premium.

Frequently asked questions

What is a PSU fund?

A PSU fund is a thematic equity mutual fund that invests primarily in shares of Public Sector Undertakings, the companies in which the Government of India or a state government holds a majority stake. Under SEBI’s thematic rule it keeps at least 80 per cent of assets in PSU stocks across sectors such as energy, banking, defence, and infrastructure.

What does PSU fund mean?

PSU stands for Public Sector Undertaking. A PSU fund means a scheme whose portfolio is concentrated in government-owned listed companies, giving investors active exposure to the public-sector theme rather than the broad market.

Are PSU mutual funds taxed as equity funds?

Yes. PSU funds hold well above 65 per cent equity, so they are taxed as equity-oriented funds: long-term capital gains over 12 months at 12.5 per cent above the Rs 1.25 lakh annual exemption under Section 112A, and short-term gains at 20 per cent under Section 111A.

What is the difference between a PSU fund and a CPSE or Bharat 22 ETF?

A PSU mutual fund is actively managed and can hold a broad set of PSU and public-sector enterprise stocks. The CPSE ETF and Bharat 22 ETF are passive, tracking a fixed government-defined index of named entities at a far lower expense ratio, and were created as disinvestment vehicles.

External references

References

SEBI October 2017 categorisation circular.
SEBI (Mutual Funds) Regulations 1996.
AMFI scheme data on PSU funds.

Reviewed and published by

WebNotes Editorial Team

The WebNotes Editorial Team covers Indian capital markets, payments infrastructure and retail investor procedures. Every article is fact-checked against primary sources, principally SEBI circulars and master directions, NPCI specifications and the official support documentation published by the intermediary in question. Drafts go through a second-pair-of-eyes review and a separate compliance read before publication, and revisions are tracked against the SEBI and NPCI rule changes referenced in the methodology section.

Last reviewed: 19 June 2026
Conflicts of interest: WebNotes is independent. No relationship with any broker, registrar or bank named in this article.