Q. I am a 25-year-old sales executive working with an MNC in Bharuch. I have been investing in large-cap companies for the past 4 years through large-cap mutual funds. I now intend to diversify my portfolio and invest in government companies. I have invested in some of the listed Navaratnas by purchasing their stock. Lately, one of my acquaintances has informed me that I can invest in government companies through PSU mutual funds. Can you please elaborate on what are PSU mutual funds, and what are the pros and cons of investing in PSU mutual funds.
Sarvesh Dholakiya, Bharuch, Guajarat
PSU mutual funds are thematic funds that invest in stocks of public sector undertakings (PSUs) in India. PSUs are companies that are either owned or controlled by the central or state government, or both. Some of the well-known PSUs in India are State Bank of India, Indian Oil Corporation, Bharat Petroleum Corporation, NTPC, Coal India, etc.
PSU mutual funds fall under the category of equity funds, as they invest predominantly in equity and equity-related instruments of PSUs. However, they are different from other equity funds in terms of their theme, risk and return profile.
What companies do PSU mutual funds invest in?
PSU mutual funds invest in a variety of sectors and industries that are dominated by PSUs. Some of the common sectors that PSU mutual funds invest in are:
- Banking and financial services.
- Oil and gas.
- Power and utilities.
- Mining and metals.
- Transportation and logistics.
- Defence and aerospace.
- Engineering and construction.
The portfolio composition of PSU mutual funds may vary depending on the fund manager's strategy, market conditions and fund objectives. However, most PSU mutual funds tend to have a large-cap bias, as most PSUs are large and established companies with high market capitalization.
What are the pros and cons of investing in PSU mutual funds?
Investing in PSU mutual funds has its own advantages and disadvantages. Some of the pros are:
Stable: PSUs are generally considered to be stable performers, as they enjoy government support, monopoly or dominant position in their respective sectors, strong cash flows and low debt levels. They also typically tend to pay regular dividends to their shareholders, which can boost the returns of PSU mutual funds.
Low correlation with other equity funds: PSU mutual funds have a low correlation with other equity funds, as they are influenced by different factors such as government policies, regulations, macroeconomic conditions, etc. This can help in diversifying the portfolio and reducing the overall risk.
Potential for value unlocking: PSUs may offer attractive value propositions, as they may be undervalued or underappreciated by the market due to various reasons such as lack of transparency, inefficiency, bureaucracy, etc. However, there may be potential for value unlocking in PSUs due to various triggers such as disinvestment, privatisation, restructuring, mergers and acquisitions, etc. These triggers can enhance the profitability, efficiency and competitiveness of PSUs, and lead to re-rating of their stocks.
Cons
High political and regulatory risk: PSUs are subject to high political and regulatory risk, as they are influenced by the government's policies, decisions and interventions. These factors can have a positive or negative impact on the performance of PSUs and their stocks. For instance, changes in fuel prices, subsidies, tariffs, taxes, etc. can affect the profitability of PSUs in sectors such as oil and gas, power, etc.
Low growth and innovation: PSUs may suffer from low growth and innovation, as they may face challenges such as lack of autonomy, competition from private players, outdated technology, etc. These factors can hamper the growth prospects and market share of PSUs in sectors such as banking, telecom, aviation, etc.
High concentration risk: PSU mutual funds may have a high concentration risk, as they may invest a large portion of their portfolio in a few sectors or companies that are dominated by PSUs. This can expose them to sector-specific or company-specific risks that can affect their performance.
How have PSU mutual funds performed in 2023?
PSU mutual funds have performed well in 2023 so far, as they have benefited from various factors such as recovery in economic activity, improvement in corporate earnings, favourable government policies, etc. The average return of top 3 PSU thematic funds was north of 30% as on 1st August 2023. However, it is important to note that past performance is not indicative of future results, and PSU mutual funds may face volatility and uncertainty due to various factors such as market conditions, government actions, sector dynamics, etc.
What kind of investors should invest in PSU mutual funds?
PSU mutual funds are suitable for investors who have:
Advanced knowledge of macro trends: Investors who have advanced knowledge of macro trends and prefer to take selective bets for higher returns compared to other equity funds. They should also be aware of the factors that influence the performance of PSUs and their stocks, such as government policies, regulations, macroeconomic conditions, etc.
High risk appetite: Investors who have a high risk appetite and are ready for the possibility of moderate to high losses in their investments even though the overall market is performing better. They should also be able to withstand the volatility and uncertainty that PSU mutual funds may face due to various factors such as market conditions, government actions, sector dynamics, etc.
Long-term investment horizon: Investors who have a long-term investment horizon of at least 5 years or more, as PSU mutual funds may take time to deliver returns due to various factors such as value unlocking, re-rating, etc. They should also be patient and disciplined in their investment approach, and avoid chasing short-term trends or performance.
Conclusion
PSU mutual funds are thematic funds that invest in stocks of public sector undertakings (PSUs) in India. They offer stable and consistent performance, low correlation with other equity funds and potential for value unlocking. However, they also have high political and regulatory risk, low growth and innovation and high concentration risk.
PSU mutual funds are suitable for investors who have advanced knowledge of macro trends, high risk appetite and long-term investment horizon. PSU mutual funds have performed well in 2023 so far, but past performance is not indicative of future results.
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Note: This is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.
