Investing PSU fund thematic mutual fund

PSU mutual fund (Public Sector Undertaking equity scheme)

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A PSU mutual fund is a thematic equity scheme that invests primarily in Public Sector Undertaking (PSU) stocks. The category sits within the SEBI sectoral and thematic framework, with schemes typically requiring 80 per cent or higher PSU equity exposure. PSU funds have gained significant retail interest through 2023-2024 following the strong performance of Indian PSU stocks across energy, defence, banking and infrastructure sectors.

For Indian retail investors, PSU mutual funds offer:

  • Concentrated PSU exposure: Active management within the PSU universe.
  • Sectoral diversification within PSUs: Across energy, banking, defence, infrastructure.
  • Active alpha potential: Through PSU stock selection.
  • Recent strong performance: PSU rally has driven category outperformance.

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

DimensionPSU Mutual FundCPSE ETFBharat 22 ETF
ManagementActivePassive (Nifty CPSE)Passive (Bharat 22 Index)
UniverseBroader PSU + PSE~11 specific CPSEs22 specific entities
Manager flexibilityActive stock selectionNoneNone
TER1.5-2.0%~0.05%~0.05%
Sectoral coverageVariableEnergy-heavyMore diversified
Suitable forActive PSU exposureSpecific CPSE basketDiversified 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.

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 favorable 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.

See also

External references

References

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

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