When the whole stock market was taking a bloodbath, public sector units (PSUs) showed better returns than other companies to their investors. For instance, Indian Bank, a PSU banking company, has increased its stock price by more than 60% in the past year. Recent price movement indicates that the momentum is still strong, and the stock may reach new highs in the following six to twelve months. PSU banks and the government's power generation sector have overperformed in the past two years.
What could be the probable reasons to invest in the PSU segment, irrespective of either way?
While talking about PSU banks, they had many problems over the past three to four years. Several bad loans have to be written off from their books. Corporations are in a better financial position now that their balance sheets have been significantly deleveraged. Thus, there aren't many NPA problems overall. In addition, increasing interest rates and better credit growth will boost their net interest margins.
On the other hand, due to the increase in demand for power in the country and the government's cautious focus on green energy while increasing the plant's generation capacities, leading towards booming the industry in the long term.
If you are looking forward to staying invested in the long-term, investing in the PSU sector today would be a better opportunity to grow your wealth.
What to prefer; stocks or mutual funds?
Both have their own advantages and disadvantages. Investing decisions would totally depend on your financial objectives, expected rate of returns, and risk-taking capacity.
Stocks
When favouring stocks of the PSU, you can have a share of ownership in the company. You can have an opportunity to grow your money at the rate of the company's growth. As a company grows, share price also increases. You can sell those shares at a much higher price than you have bought.
Mutual Funds
In the case of mutual funds, your fund manager will take care of your portfolio diversification. Your fund managers will take care of the exit and entry of the invested amount in return for which you have to pay particular fees.
ICICI Prudential Mutual Fund has introduced a PSU Equity Fund to invest in publicly traded government-owned businesses. On August 23, the new fund offering (NFO) began. As required by SEBI for theme mutual funds, ICICI Prudential PSU Equity Fund would invest 80% of its capital in PSU stocks. For the remaining 20% of the mutual funds, managers will have the flexibility to explore better opportunities in different sectors of the economy.
Investing in such a particular sector would benefit you by offering larger dividend rates, which will be more tax-efficient when accumulated through the mutual fund route. Additionally, there will be a general election in the following two years, and generally, PSU stocks perform well during this time, irrespective of whether you buy stocks or mutual funds.
Sectors like energy, metals, banks, logistics, capital goods, etc., have a large portion of PSU existence whose capex cycle is expected to improve perpendicularly due to the favourable government's policy of production linked scheme (PLI).
Anushka Trivedi is a freelance financial content writer. She can be reached at anushkatrivedi.com