Best banking & PSU funds to invest in 2020

Most mutual fund advisors are asking risk-averse investors to consider investing in relatively-safer banking & PSU funds these days.

Banking & PSU mutual funds are in the spotlight these days. A series of defaults and downgrades in the debt mutual fund space in the last two years, and the recent Franklin fiasco, have forced many traditional debt mutual fund investors to become extra risk-averse to preserve their capital. Banking & PSU funds have emerged a natural choice in the scenario.

As per Sebi norms, banking & PSU mutual funds have the mandate to invest at least 80% of their corpus in debt instruments of banks, public sector undertakings, public financial institutions. Because of the investment universe and the government ownership of most of the entities, investment experts consider this as a safer investment.

Note, these schemes have the option to invest in private banks, too. However, since banks are tightly regulated and monitored by the Reserve Bank of India and the central government, many investors believe they are relatively safer even in times of crisis.

Here is the monthly update on our recommended banking & PSU funds in September. There are no changes in the list. However, a word about the performance of LIC MF Banking & PSU Debt Fund. The scheme has been in the third quratile for the last three months. We will watch its performance closely and update you about it in the next month.

You can consider investing in these schemes with a horizon of at least three years.

Best banking & PSU funds to invest in 2020
  • IDFC Banking & PSU Debt Fund
  • Axis Banking & PSU Debt Fund
  • Aditya Birla Sun Life Banking & PSU Debt Fund
  • DSP Banking & PSU Debt Fund
  • LIC MF Banking & PSU Debt Fund
If you are looking for relatively safer investment options in the debt mutual fund category to invest for three years or more, you may consider investing in these schemes. They may offer you some extra after-tax returns than the traditional bank fixed deposits.

Investments held in debt mutual funds for more than three years qualify for long-term capital gains tax of 20% with indexation benefit. The indexation helps to reduce the purchase cost and bring down the rate of tax considerably in an inflationary scenario. Interest on bank deposits are added to the income and taxed according to the income tax slab applicable to the investor.

Methodology has employed the following parameters for shortlisting the debt mutual fund schemes.

1. Mean rolling returns: Rolled daily for the last three years.

2. Consistency in the last three years: Hurst Exponent, H is used for computing the consistency of a fund. The H exponent is a measure of randomness of NAV series of a fund. Funds with high H tend to exhibit low volatility compared to funds with low H.
i)When H = 0.5, the series of return is said to be a geometric Brownian time series. These type of time series is difficult to forecast.
ii)When H <0.5, the series is said to be mean reverting.
iii)When H>0.5, the series is said to be persistent. The larger the value of H, the stronger is the trend of the series

3. Downside risk: We have considered only the negative returns given by the mutual fund scheme for this measure.
X =Returns below zero
Y = Sum of all squares of X
Z = Y/number of days taken for computing the ratio
Downside risk = Square root of Z

4. Outperformance:
Fund Return – Benchmark return. Rolling returns rolled daily is used for computing the return of the fund and the benchmark and subsequently the Active return of the fund.

Asset size: For Debt funds, the threshold asset size is Rs 50 crore

(Disclaimer: past performance is no guarantee for future performance.)

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