Public Sector Undertakings (PSU) Bonds

What are PSU bonds?

PSU bonds are debt securities issued by public sector undertakings (PSUs) in which the central or state governments own a greater than 51% stake. These bonds are an important source of financing for PSUs and offer investors a relatively stable investment avenue backed by the government. Additionally, the PSU bond definition states that they are issued with maturity periods ranging between 5-10 years, making them suitable for investors with a medium to long-term horizon.

Types of PSU bonds

There are several forms of PSU bonds, including:

• Fixed-rate bonds
• Floating-rate bonds
• Inflation-indexed bonds
• Zero-coupon bonds

How do PSU bonds work?

Investing in PSU bonds is like lending money to government-backed firms. These firms (PSUs) use your money for projects and business development and repay the investors with an interest.

Potential advantages of investing in PSU bonds:

There are various advantages of investing in PSU bonds. Some of them are mentioned below:

Return potential: PSU bonds offer fixed and regular interest payments making them suitable for investors seeking a relatively steady income.

Relatively low risk of default: Government backing of PSUs ensures that the risk of default on interest payments and principal repayment is minimal.

Diversification: Investing in fixed-income securities like PSU bonds can enhance portfolio diversification and mitigate the overall risk.

Tax efficiency: Certain PSU bonds are tax-free wherein the interest generated is exempted from taxation.

Who should invest in PSU bonds?

Investing in PSU bonds can be suitable for:

Risk-averse investors: Investors seeking relative stability of the principal and potentially regular interest payments may consider PSU bond funds.

Diversification: Allocating a part of your portfolio to fixed-income instruments can offer overall risk mitigation.

Income seekers: Investors planning for retirement or those seeking a potentially steady income can consider PSU bond funds.

Extended horizon: Since PSU bonds are issued with maturities between 5-10 years, they can be suitable for investors with a medium-to-long term horizon.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.