Banking and PSU Mutual Funds

A banking and PSU fund must keep at least 80% of its money in debt issued by four kinds of borrower. They are banks, public sector undertakings (PSUs), public financial institutions (PFIs) and the bodies that issue municipal bonds.

A mutual fund is a pool of money from many people, invested by a professional manager under SEBI rules. A debt fund puts that pool into loans, by buying bonds and similar paper from governments, banks or companies.

SEBI renamed these categories in February 2026, and fund houses had until 26 August 2026 to rename their schemes. This one is now the Banking and PSU Debt Fund.

The 80% is smaller than it looks. Like most debt funds, this one must hold at least 10% of its net assets, its total value, in liquid assets. Those are cash, government securities, treasury bills or repo on government securities. SEBI then applies the 80% to the other 90%. Its own worked example uses this very category: 80% of 90% gives a floor of 72% of the whole fund.

Two things the rule does not set:

• A rating floor. SEBI sets no minimum credit rating for this category; the fund's PRC cell shows the most credit risk it may take. The Potential Risk Class (PRC) grid puts every debt fund in one of nine cells. Each cell caps duration and credit risk, both explained below. Our short duration page explains the grid.
• A duration band. SEBI's rule for this category is about who borrows, not how long for.

You can sell your units whenever you like. There is no lock-in, a period when you cannot sell at all.

In plain words:

• PSUs are companies that the central or a state government controls, usually by owning at least 51%.
• Public financial institutions are a short list of government-linked lenders named by law, such as LIC.
• Municipal bonds are bonds issued by city corporations and other civic bodies, and by bodies set up to raise money for them. They must carry a credit rating.

Municipal bonds have been part of the rule since 26 February 2026. Few funds on this list held any at the end of August 2026.

A PSU is not the government, and its bonds are not government bonds. SEBI's own credit scale keeps them apart. In the PRC grid, central and state government securities score 13, while AAA paper scores 12 whoever issued it.

In the funds on this list at the end of August 2026, bonds made up by far the largest share. Next came certificates of deposit, short IOUs from banks. Cash and a little government paper made up most of what was left.

No. SEBI makes every fund show a riskometer, a risk label on six levels from Low to Very High, checked monthly. A debt fund's label rests on three scores for the whole portfolio: credit, interest-rate and liquidity risk. SEBI averages them and maps the result to a level.

Most listed banking and PSU funds read Moderate on 29 September 2026; the rest read Low to Moderate.

All three risks are still here:

• Credit risk is the chance a borrower pays late or does not pay back. Agencies grade debt by their opinion of whether it will be repaid in full and on time. AAA is the top grade, the highest degree of safety; AA is high and A adequate. SEBI's investor site warns that these opinions can change quickly.
• Interest-rate risk is the chance that a change in rates changes what the bonds are worth. SEBI's investor website gives the direction: as rates go up, bond prices tend to go down, and the other way round. Your units rise and fall with the bonds beneath them. SEBI gauges this risk with Macaulay duration, the average wait in years for a bond's payments, each weighted by its value today. A longer duration earns a higher risk score.
• Liquidity risk is the chance a holding cannot be sold quickly at a fair price.

Holdings are valued at market prices, so the NAV, the price of one unit, can change every day.

If a bond is cut below investment grade or defaults, the fund house may split it off into a segregated portfolio. The trustees, the company holding the fund's assets for you, must agree. You get as many units in it as you hold in the fund, and anything later recovered is paid to you.

If a fund's riskometer level changes, you must be told by email or SMS. Koshex reviews your holdings over time and flags shifts like this one.

Two of SEBI's spreading rules leave out some public sector paper. They are the 20% caps on any one sector and on any one business group. A third, the cap on any one borrower, does not.

• One sector: at most 20% of net assets. AAA paper of public financial institutions and public sector banks does not count towards it.
• One business group: at most 20%, or 25% with approval from the fund house's board and the trustees. Paper from PSUs, PFIs and public sector banks is left out of this count.
• One borrower: at most 10% of the fund if rated AAA, 8% if rated AA and 6% if A or lower. Board and trustee approval allows 2% more. Only government securities, treasury bills, repo on them and debt ETFs sit outside this cap. So one PSU or one bank counts like any other borrower.

The riskometer draws a similar line. In SEBI's riskometer, AAA-rated public sector paper scores as low on credit and liquidity risk as government bonds. Other listed, plain AAA bonds score a notch higher on liquidity, 2 against 1. The interest-rate score still depends on duration, whoever the borrower is.

A low score is SEBI's measure, not a promise of repayment.

Each is defined by something different. This category is defined by who borrows. A corporate bond fund is defined by who borrows and at what rating. A short duration fund is defined by how long its portfolio runs.

• Banking and PSU: at least 80% in debt of the four borrower types, with no SEBI rating floor and no duration band.
• Corporate bond: at least 80% in corporate bonds rated AA+ or higher. Its 80% is also counted after the 10% liquid floor, so 72% of the whole fund.
• Short duration: a portfolio Macaulay duration of 1 to 3 years, lent to any borrower. SEBI now calls it the Short Term Fund.

The riskometer barely tells the three apart. On 29 September 2026, most listed funds in each of them read Moderate and the rest Low to Moderate.

Our suggested horizon is 1 to 3 years or more here and for corporate bond funds. For short duration funds we suggest 1 to 3 years. These are Koshex's suggestions, not SEBI rules.

Say you plan to part-prepay your home loan in about three years. That is the kind of timeline our suggestion for this category has in mind.

For units bought on or after 1 April 2023, the gain is taxed at your slab rate, your normal income-tax rate. How long you held the units, your holding period, makes no difference. Section 76 of the Income-tax Act, 2025 treats it as a short-term capital gain, as if you had sold soon after buying. That section covers any Specified Mutual Fund, one with more than 65% in debt and money market instruments, and this category is one.

Here is an assumed example, not a forecast. You bought units in March 2024 and sell them in September 2026 at a gain of ₹67,000. A 4% cess, an extra charge on the tax, is added. No surcharge is assumed; that further charge on the tax starts once total income passes ₹50 lakh.

• Whole gain in your 20% slab: ₹13,400 tax plus ₹536 cess, so ₹13,936.
• Whole gain in your 30% slab: ₹20,100 plus ₹804 cess, so ₹20,904.

Units bought before 1 April 2023 pay slab rate if held 24 months or less. After that they pay 12.5% without indexation, with no inflation adjustment to cost.

A resident pays no TDS, tax deducted at source before money reaches you, on redemption gains. IDCW is a payout from the fund's income or gains, and it lowers the NAV by the amount paid. It is taxed at your slab rate. When your IDCW from one fund house passes ₹10,000 in a tax year, 10% TDS comes off the whole payout, not only the excess. The TDS is credited against your tax for the year.

The 3-year and 5-year CAGR, average yearly growth over the period, are the natural place to begin. There are 20 listed banking and PSU funds. Of these, 19 have run for three years or more. Only they are ranked on 3-year return and counted in the averages. Whichever ranking you pick, the table shows its top 10.

• CAGR assumes the fund grew at the same pace every year. Set a fund's figure beside the category averages: 6.0% over 3 years and 6.3% over 5. Each is a simple average over funds with a 3-year record, and each looks back.
• Riskometer and PRC cell. Funds with similar returns can sit at different levels.
• Expense ratio is the fund's yearly fee, shown as a percentage of your money and taken out of the fund's value.
• AUM, assets under management, is the current total value of the money a fund manages. The listed funds manage ₹75,374 Cr between them.

Every fund posts its full list of holdings monthly, and a debt fund posts it fortnightly as well, with each bond's yield. That shows which banks, PSUs and institutions it has lent to. Factsheets usually give the portfolio's Macaulay duration and its yield to maturity (YTM). That is what the bonds would return if kept until they mature, bought at today's prices.

An exit load is a fee some funds charge if you sell within a set time. SEBI does not set an exit load for this category. Each fund sets its own, if any, in its scheme document; some charge none. When you sell, the fund must pay you within 3 working days.

A lumpsum puts in a larger amount at one time. A SIP invests a fixed amount at regular intervals, usually monthly, and each instalment is its own lot, taxed at slab rate.

Koshex, a distributor registered with AMFI (ARN-154632), helps you buy and manage funds. Through us you get regular plans, the version of a fund bought through a distributor. We can help you pick a fund that fits your goal and your timeline.