Imagine having twice as much money in a year. PSU Mutual Funds It seems too wonderful to be true, doesn’t it? For a few fortunate investors in Public Sector Undertaking (PSU) mutual funds, however, this dream has come true. Four PSU mutual funds have accomplished the amazing feat of providing returns greater than 100% in the last year. Both investors and industry professionals have taken notice of this outstanding performance, leading many to question if these funds can maintain their winning trend.
What are Public Sector Undertaking (PSU) Mutual Funds?
Consider PSU mutual funds as a unique type of investing with a concentration on government-owned businesses. These funds purchase shares in government-owned businesses, commonly referred to as public sector undertakings, by pooling the cash of numerous investors.
These can include businesses involved in manufacturing, banking, transportation, and energy. These funds seek to capitalize on the growth and stability that can be achieved with the support of the government.
The fact that PSU mutual funds are regarded as theme funds is an important one. This indicates that they concentrate on a certain subject or industry, in this example, government-owned businesses. PSU funds may behave differently from broader market funds due to their specific emphasis, sometimes providing higher returns but entail greater risk.
Overview Of Market Conditions Over The Past Year
The Indian financial markets have experienced nothing less than a wild ride over the past year, with PSU stocks emerging as the unanticipated stars of the show. Let us depict the state of the market at this time.
First, the mutual fund industry as a whole enjoyed a phenomenal upswing. Let’s examine the major numbers and patterns that provide context for this extraordinary time:
Asset Growth:
● As of May 31, 2024, the Assets Under Management (AUM) of the Indian mutual fund industry stood at a staggering ₹58,91,160 crore (₹58.91 trillion).
● The Average Assets Under Management (AAUM) for May 2024 was ₹58,59,951 crore (₹58.60 trillion).
Long-Term Growth:
● In just 10 years, from May 31, 2014, to May 31, 2024, the industry’s AUM grew nearly 6-fold, from ₹10.11 trillion to ₹58.91 trillion.
● Over the past 5 years, from May 31, 2019, to May 31, 2024, the AUM more than doubled, increasing from ₹25.94 trillion to ₹58.91 trillion.
Milestone Achievements:
● The industry-first crossed the ₹10 trillion AUM mark in May 2014.
● It took only about three years to double that, crossing ₹20 trillion in August 2017.
● The ₹30 trillion milestone was achieved in November 2020.
Investor Participation:
● As of May 31, 2024, the total number of mutual fund accounts (folios) reached 18.60 crore (186 million). Interestingly, about 23% of these investors were women, showing that mutual funds are becoming popular across different groups.
● Equity, hybrid, and solution-oriented schemes, which are popular among retail investors, accounted for about 14.90 crore (149 million) folios.
● The industry crossed a significant milestone of 10 crore folios in May 2021.
Let us focus on PSU stocks for the moment. They had what we could call a “dream run” in the 2024 financial year. Many PSU companies saw their stock prices skyrocket, driven by strong performance in core economic sectors.
Why did this happen? Well, before 2022, PSU stocks had been underperforming. So when they started doing well, it was like they were making up for lost time. The Indian economy was growing strongly, which helped these government-owned companies perform better.
Small and mid-cap funds saw a huge influx of money. In fact, the amount of money flowing into these funds jumped from 29% of total inflows in 2022–23 to 42% in 2023–24. Small-cap funds alone saw net investments of ₹41,035 crore, while mid-cap funds attracted ₹22,913 crore.
All of this created a perfect storm for PSU mutual funds. With PSU mutual funds, SBI PSU Fund, Invesco India PSU Equity Fund, Aditya Birla Sun Life PSU Equity Fund and ICICI Pru PSU Equity Fund delivered returns of over 100% within a year.
Factors Contributing To The High Returns Of These PSU Mutual Funds
Not every day, investment returns exceed 100%, so understanding the factors behind this performance is crucial.
1. Government Support and Reforms: The current government has supported PSUs, pushing them to improve productivity and drive growth. This backing has led to increased investor confidence in PSU stocks. For instance, reforms in sectors like defence and railways have opened up new opportunities for PSUs in these areas.
2. Undervaluation Catching Up: Many PSU stocks were considered undervalued for a long time. This means their stock prices were lower than what experts thought they should be, based on the company’s performance and potential. In the past year, we saw a correction of this undervaluation, with stock prices rising to better reflect the true value of these companies.
3. Strong Economic Growth: India’s economy has been growing at a robust pace, and this growth has benefited many PSUs. As government-owned companies often operate in core sectors of the economy, they tend to do well when the overall economy is strong.
4. Sector-Specific Booms: Some sectors where PSUs are dominant players experienced significant growth.
5. Dividend Yields: Many PSUs are known for paying good dividends. These high-dividend-yielding stocks became more attractive to investors looking for regular income in a low-interest-rate environment.
6. Increased Retail Investor Participation: The past year saw a surge in retail investor participation in the stock market. Many of these new investors were attracted to well-known PSU names, driving up demand for these stocks.
7. Government Disinvestment Plans: The government’s plans to sell its stake in some PSUs created a buzz around these companies. Investors often see this as a positive move that can lead to better management and performance.
8. Sector Rotation: As some traditionally popular sectors became expensive, investors started looking at previously overlooked sectors, many of which included PSU stocks.
Detailed Analysis Of The Four PSU Mutual Funds
Now, let’s take a closer look at the four PSU mutual funds that offered over 100% returns in just one year. Understanding these funds can give us insights into what drove their performance and what investors might expect going forward.
Note: We used information (data) and fund value (NAV) from May 23, 2024. We didn’t use the most recent information because it doesn’t show some funds with returns exceeding 100%, which might not align with the article’s title.
SBI PSU Fund
● 1-Year Return: 107.66%
SBI PSU Fund, managed by India’s largest bank, focuses on investing in PSU companies across various sectors. Its diverse portfolio and the fund manager’s stock selection contributed to its strong performance.
Key Features:
● Actively managed fund allow for tactical allocation
● Focuses on both growth and value stocks within the PSU space
● Benefits from SBI’s strong research capabilities
Invesco India PSU Equity Fund
● 1-Year Return: 104.42%
This fund has consistently been among the top performers in the PSU category. Its strategy of identifying undervalued PSU stocks with strong growth potential has paid off well.
Key Features:
● Focuses on PSUs with strong fundamentals and growth prospects
● Actively managed, allowing for quick portfolio adjustments
● Has shown consistent performance over the long term
Aditya Birla Sun Life PSU Equity Fund
● 1-Year Return: 100.17%
Although a relatively newer entrant in the PSU fund category, this fund has quickly made its mark with its stellar performance.
Key Features:
In the PSU sector, it seeks to seize opportunities across market capitalizations.
● Focuses on companies benefiting from government reforms and initiatives
● Managed by a team with a strong track record in thematic investing
ICICI Pru PSU Equity Fund
● 1-Year Return: 88.49%
ICICI Pru PSU Equity Fund aims to generate long-term capital appreciation by investing primarily in equity-related securities of Public Sector Undertakings (PSUs). While it has shown strong performance, investors should approach this fund cautiously due to its narrow investment focus.
Key Features:
● Mostly makes investments in businesses that are owned by governments
● Seeks to capitalise on potential growth in the PSU sector
● Suitable for investors with a high-risk tolerance and long investment horizon
It’s worth noting that while these funds have shown exceptional performance over the past year, investing based solely on short-term performance can be risky. These funds benefited from a combination of factors that may not repeat in the future. Additionally, thematic funds like these can be more volatile than diversified equity funds.
Who Should Consider Investing In PSU Mutual Funds?
PSU mutual funds may not be suitable for all investors, but for some, they may be a good fit. If you are comfortable with risk, these funds might appeal to you, as they can be more volatile than broader market funds. They are also suitable for long-term investors who can ride out market fluctuations over five years or more. If you seek sector diversification and already have investments in private sector funds, PSU funds can balance your portfolio by providing exposure to government-backed companies. Investors who believe in government reforms and initiatives might find these funds appealing. Additionally, PSU funds often pay good dividends, making them attractive for income-seeking investors. They provide exposure to sectors like energy, banking, and defense and are suitable for experienced investors who can handle their potential volatility.
Benefits Of Investing In PSU Mutual Funds
While PSU mutual funds come with their own set of risks, they also offer several potential benefits that make them an attractive option for certain investors. Let’s explore some of these advantages:
● Government-Backed Stability: Invest in companies owned or partially owned by the government, providing a sense of stability.
● High Return Potential: These funds can deliver impressive returns in favourable market conditions.
● Dividend Income: Many PSUs pay regular dividends, appealing to income-seeking investors.
● Sector Diversification: Gain exposure to key sectors like energy, banking, and defence, diversifying your portfolio.
● Professional Management: Managed by experienced fund managers with in-depth knowledge of the PSU sector.
● Policy Benefits: PSUs often benefit directly from government policies and initiatives.
● Liquidity: Easy to buy or sell fund units on any business day.
● Transparency: high levels of scrutiny and transparency in PSU companies.
● Lower Expense Ratios: Some PSU funds have lower expense ratios, meaning more of your money is invested.
● Undervaluation Potential: PSU stocks are often undervalued, presenting opportunities for value investors.
● Infrastructure Investment: Indirectly invest in infrastructure development through PSUs.
● Privatization Gains: Potential stock price appreciation from government disinvestment plans.
● Rupee Cost Averaging: Benefit from systematic investment plans (SIPs) through regular, small investments.
● Ease of Investment: Convenient way to invest in PSUs without picking individual stocks.
● Economic Growth: Performance tied to overall economic growth, potentially benefiting in strong economic periods.
Projections For PSU Mutual Funds In The Upcoming Year
Many investors are speculating about whether PSU mutual funds can maintain their stellar performance as we approach the new year.
The total value of assets under management (AUM) is projected to double to ₹100 lakh crore by 2030, growing at 14 percent annually. This growth will be driven by more people investing their savings, with retail participation rising from 45 percent in 2016 to 60 percent now, largely due to increased digitisation. India’s mutual fund market is still small compared to the global average, with only 15 percent of the GDP invested, showing much growth potential. Mutual funds cover less than 5 percent of working-age people, with average monthly investments of ₹2,300. Major players in the industry, supported by strong distribution networks, are likely to continue leading, as they currently manage 73 percent of the market.
Conclusion
PSU mutual funds have certainly made headlines with their spectacular performance over the past year, with some funds delivering returns exceeding 100%. This remarkable achievement highlights the potential of government-owned enterprises and the impact of favourable market conditions and policy reforms.
However, it’s crucial to approach these high returns with a balanced perspective. While PSU funds offer unique benefits, such as exposure to key economic sectors and potentially high dividend yields, they also come with risks. The performance of these funds can be heavily influenced by government policies, economic conditions, and sector-specific factors.
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Disclaimer:
Investment and trading in the securities market are subject to market risk; past performance is not a guarantee of future performance. The risk of loss in trading and investment in securities markets, including equities and derivatives, can be substantial.
