Best Banking and PSU Mutual Funds in India 2026: Top 10 & Guide
What Banking and PSU mutual funds are, who should invest, key risks, and the top 10 funds with returns and risk data.
Banking and PSU funds are debt funds that put 80% of their net assets into instruments issued by banks, public sector undertakings and public financial institutions. They aim for lower risk and stable returns. This guide covers who should invest, benefits, risks, and the top 10 banking and PSU funds from our data.
Key takeaways
- Banking and PSU funds invest 80% of net assets in debt issued by banks, PSUs and public financial institutions.
- They are relatively low risk but still face interest rate and credit risk.
- They suit a short to medium horizon of 2 to 4 years and investors who want to add a debt component.
- Returns are considerably lower than equity returns, and diversification across sectors is limited.
- The top 10 funds below are ranked by an internal score, with return and risk numbers shown.
What are banking and PSU mutual funds?
A banking and PSU fund is a debt mutual fund that invests 80% of its net assets in debt instruments issued by banks and public sector undertakings (PSUs). It also invests in fixed-income instruments of public financial institutions. The primary goal is to offer lower risk and stable returns.
Who should invest in banking and PSU funds?
- Risk-averse investors, since this is a debt fund.
- Equity investors who want a debt component for diversification.
- Investors seeking interest or dividend income from fixed-income securities.
- Investors parking money for a short to medium term of 2 to 4 years.
What should you consider before investing?
- Risk profile and horizon: they are relatively low risk compared with equity schemes but not risk-free, and suit moderate risk appetite and a short to medium horizon.
- Interest rate movements: when rates fall, bond prices rise, and the funds generally benefit in a falling rate environment.
- Credit quality and portfolio composition: check the holdings. A portfolio concentrated in AAA-rated instruments indicates higher safety.
- Fund details and management: review historical performance across conditions and the manager's track record.
Advantages of banking and PSU funds
- Lower risk than equity-oriented funds.
- High-quality fixed-income holdings from banks and PSUs, which helps reduce credit risk.
- Stability: debt instruments are less volatile, and investors may gain from capital appreciation when rates decline.
- Diversification across asset classes.
Risks of banking and PSU funds
- Rising interest rates hurt returns.
- Returns are considerably lower than equity, so these funds are not ideal for long-term wealth creation.
- Limited diversification, as the funds hold only banking and PSU instruments.
- Credit risk still exists even with high-rated debt.
How are Banking and PSU mutual funds taxed?
Gains from Banking and PSU funds are subject to tax on gains, with the rules depending on the type of debt fund and the date of purchase. The rates and holding-period rules depend on the fund type and can change, so check the current rules or speak to a tax advisor before you invest.
Top 10 Banking and PSU mutual funds ranked by an internal score
These are the top 10 Banking and PSU funds from our data, ranked by Invo Wealth's internal fund-quality score. The score itself is not shown, only the return and risk numbers behind it. A "--" means the fund has not completed that period or the data is unavailable.
Returns across 6 months to 5 years
Performance data as of 5 September 2026.
| Fund | 6M CAGR | 1Y CAGR | 3Y CAGR | 5Y CAGR |
|---|---|---|---|---|
| UTI Banking & PSU Debt Fund | 6.59% | 6.00% | 7.19% | 7.44% |
| ICICI Prudential Banking and PSU Debt Fund | 5.61% | 5.60% | 7.02% | 6.34% |
| Franklin India Banking & PSU Debt Fund | 6.31% | 6.43% | 7.23% | 6.09% |
| Kotak Banking and PSU Debt Fund | 5.13% | 5.49% | 7.04% | 6.11% |
| HSBC Banking and PSU Debt Fund | 5.24% | 5.16% | 6.70% | -- |
| Aditya Birla Sun Life Banking & PSU Debt Fund | 5.05% | 4.98% | 6.78% | 5.92% |
| Bandhan Banking and PSU Debt Fund | 6.65% | 5.69% | 6.90% | 5.93% |
| Canara Robeco Banking and PSU Debt Fund | 4.96% | 4.87% | 6.40% | -- |
| HDFC Banking and PSU Debt Fund | 5.06% | 5.11% | 6.81% | 5.89% |
| Axis Banking and PSU Debt Fund | 5.24% | 5.18% | 6.77% | 5.88% |
Risk and consistency metrics
| Fund | ISIN | Volatility | Max drawdown (3Y) | Sortino ratio |
|---|---|---|---|---|
| UTI Banking & PSU Debt Fund | INF789F014Z9 | 0.97% | -0.41% | 0.33 |
| ICICI Prudential Banking and PSU Debt Fund | INF109K01RT3 | 1.26% | -0.67% | 0.02 |
| Franklin India Banking & PSU Debt Fund | INF090I01KO5 | 1.19% | -0.64% | 0.31 |
| Kotak Banking and PSU Debt Fund | INF174K01FO3 | 1.40% | -0.64% | 0.04 |
| HSBC Banking and PSU Debt Fund | INF677K01AE7 | 1.21% | -0.66% | -0.40 |
| Aditya Birla Sun Life Banking & PSU Debt Fund | INF209K01LV0 | 1.29% | -0.61% | -0.26 |
| Bandhan Banking and PSU Debt Fund | INF194K01SN6 | 1.12% | -0.56% | -0.14 |
| Canara Robeco Banking and PSU Debt Fund | INF760K01KF7 | 1.14% | -0.67% | -0.81 |
| HDFC Banking and PSU Debt Fund | INF179KA1JC4 | 1.35% | -0.75% | -0.21 |
| Axis Banking and PSU Debt Fund | INF846K01CB0 | 1.12% | -0.56% | -0.33 |
Compare volatility and drawdown across funds; differences here often reflect duration and credit mix.
How to invest in Banking and PSU mutual funds
You can invest in these funds using the Invo Wealth app. Sign up, get complete portfolio insights and start investing in mutual funds that actually suit you.
Conclusion
Banking and PSU funds offer relatively low-risk debt exposure for 2 to 4 year goals. Check credit quality, rate sensitivity and costs before investing.
Frequently asked questions
What is a banking and PSU fund?
It is a debt fund that invests 80% of its net assets in debt instruments issued by banks, public sector undertakings (PSUs) and public financial institutions.
Who should invest in banking and PSU funds?
Investors who want a lower-risk debt option, equity investors adding a debt component, those seeking interest income, and people with a short to medium horizon of 2 to 4 years.
Are banking and PSU funds risk-free?
No. They are relatively low risk compared with equity funds but face interest rate risk and credit risk, and their returns are lower than equity returns.
How are banking and PSU funds taxed?
They are taxed like other debt funds: gains are treated as income and taxed at the applicable rate regardless of the holding period, subject to the rules in force.
How can I invest in banking and psu mutual funds?
You can invest through a SIP or a lump sum. To invest in these funds, you can use the Invo Wealth app: sign up, get portfolio insights and start investing.
Mutual fund investments are subject to market risks; read all scheme-related documents carefully. This article is for education only and is not investment advice. Past performance does not guarantee future returns. Invo Wealth is an AMFI-registered mutual fund distributor (ARN-368528).