Are you looking for relatively safe debt funds to invest for a few years? You can consider investing in Banking & PSU debt funds as these schemes have the mandate to invest at least 80% of their corpus in debt investments of banks, public sector undertakings, and public financial institutions.

Mutual fund advisors say banking & PSU debt schemes are ‘relatively’ safe because these schemes invest only in bonds and papers of banks and public sector companies. Since most of these entities are government-backed, they don’t have the credit risk.

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These schemes have become extremely popular after the troubles in the debt mutual fund space three years ago. The debt market was rocked by downgrades and defaults not long ago. Many conservative investors stopped investing in debt schemes because they were scared of getting back their money.

However, this doesn’t mean that these schemes do not have any risk at all. For example, these schemes also invest in papers issued by private banks. Since they don’t have government backing, they carry some risk. However, since banks are highly regulated, the risk is minuscule. Also, interest rate changes can adversely affect these schemes.

A rising or firm interest rate environment is bad for debt funds. However, since these schemes do not invest in very long-duration papers, they will be relatively better off. Most money market pundits say the interest rates have peaked and the RBI will start cutting interest in the later part of the year. It may start cutting rates, once it is convinced that inflation is cooling off. However, be prepared for some volatility till then.If you are investing for three years and aware of the risks associated with these schemes, you can consider investing in Banking & PSU schemes. DSP Banking & PSU Debt Fund has been in the second quartile for 10 months. The scheme was in the third quartile earlier. Axis Banking & PSU Debt Fund, one of our recommended schemes, has been in the third quartile for the last 13 months. Here are our recommended schemes.Look for our monthly updates to keep track of your schemes.

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Best Banking & PSU funds to invest in December 2024:

• Bandhan Banking & PSU Debt Fund
• Axis Banking & PSU Debt Fund
• Aditya Birla Sun Life Banking & PSU Debt Fund
• DSP Banking & PSU Debt Fund
• Kotak Banking & PSU Debt Fund

Methodology:

ETMutualFunds 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 returns is said to be a geometric Brownian time series. These types of time series are difficult to forecast.

ii)When H

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

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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.)