Top Banking and PSU Mutual Funds for Investment in October 2024
If you are looking for debt funds that come with relatively less risk with a time horizon of a few years, then Banking and PSU debt funds would be a good choice. As they are mandated to invest at least 80% of their assets in debt instruments issued by banks, public sector undertakings, and public financial institutions, it provides the right balance between safety and return.
Most banking and PSU debt funds, for example, are perceived as low risk because they invest in bonds and papers issued by banks and public sector enterprises. Such organizations are often perceived to have government backing, thereby diminishing the credit risk that investors normally fear in debt products. Demand for these funds has skyrocketed since the debt market was shaken by a series of high-profile defaults and downgrades a few years ago. During that period, conservative investors exited most debt funds in regard to fearing losses in the portfolio.
It is worth noting here that these funds appear to be safest, yet, not risk-free absolutely. Some investment products of certain funds also go for issues by private banks, which do not carry the stamp of the government and therefore entail a degree of risk. However, the banking sector is quite heavily regulated and, by extension, relatively safe. Besides, the interest-rate sensibility can be seen as a negative attribute for these funds as their performance may be affected in case of a sudden spurt in interest rates.
In a rising interest rate scenario, on average, debt funds tend to underperform. However, this aspect does not make Banking and PSU debt funds vulnerable much because they do not invest in long-duration papers. Experts in the money markets believe interest rates have probably peaked and that the RBI is likely to start cutting the cycle later in the year if inflation cools. In the interim, investors need to be prepared for some market volatility.
For those with a three-year investment horizon, who are comfortable with the risks associated with these funds, Banking and PSU debt schemes can be an attractive choice. For example, one particular fund has moved from the third to the second quartile in recent months, indicating improved performance. Another recommended fund has been consistently ranked in the third quartile over the past year.
Best Banking and PSU Mutual Funds to Invest in October 2024
- Bandhan Banking and PSU Debt Fund
- Axis Banking and PSU Debt Fund
- Aditya Birla Sun Life Banking and PSU Debt Fund
- DSP Banking and PSU Debt Fund
- Kotak Banking and PSU Debt Fund
How do we choose these funds?
These funds were filtered through the following parameters:
1. Rolling Average Returns: Calculate mean rolling returns over the last three years to know if the fund has a smooth curve or not.
2. Consistency Over Three Years: The Hurst Exponent, H is used for measuring consistency in the NAV series of a fund. A high H value will signify low volatility in a fund.
- When H = 0.5, returns are geometric Brownian motion, which becomes unpredictable.
- When H < 0.5, the returns show a mean-reverting behaviour.
- When H > 0.5, the returns display persistence where the greater values indicate a stronger trend.
3. The Upside Risk Downside Risk: This captures the negative returns only:
- X represents the returns that are less than zero.
- Y is the square sum of X.
- Z is the ratio of Y to the number of days considered.
- Downside risk is the square root of Z.
4. Outperformance: This can be calculated as the return from the fund compared with the return from its benchmark, rolling returns can be used to determine the active return of the fund.
5. Asset Size: A minimum asset size of Rs 50 crore was taken as the cut-off point for the debt funds to consider for the selection process.
Conclusion
Using these criteria, it was only those with excellent performance and moderate risks that would make it into the list recommended for conservatively oriented investors seeking stability in their portfolio.
