What are PSU Bonds? How it works, benefits & more

In recent years, Public Sector Undertakings or PSU bonds have gained significant attention from investors due to their attractive interest rates and close competition with traditional investment schemes. These bonds are issued by public sector companies that operate in a wide range of industries, such as energy, finance, telecommunications, and more. Find out more about PSU bonds and whether or not they make for a good investment for you.

What are PSU bonds?

PSU bonds are a type of debt security issued by government sector companies and undertakings that have a 51% or more share of the central or state governments. Since the government has more than half a share in these bonds, these securities are among the lowest rated in terms of risk in the bond category and can be ideal for conservative investors.

There are different types of PSU bonds, including fixed-rate bonds, floating-rate bonds, sovereign gold bonds, inflation-indexed bonds, zero-coupon bonds, and others.

To understand these bonds better, it is essential to know how they work.

How do PSU bonds work?

Bonds are a type of loan where you lend money to the issuing authority and receive interest income in return. When you invest in a PSU bond, you put money in a bond issued by public sector banks and other entities. The bond issuers use this money for their projects and offer you a fixed return in return at select intervals.

Let’s now move to the benefits of investing in these bonds.

Benefits of PSU bonds

• Low risk: The companies that issue these bonds are considered less risky than private companies. Moreover, as stated above, with at least half the share of the government, PSU bonds carry minimal risk and can offer stable financial growth.
• Stable income: PSU bonds typically offer fixed and regular interest payments, providing you with a steady income stream. This can be particularly beneficial if you rely on income from your investments to meet your financial needs, such as in retirement.
• Diversification: Diversifying your investment portfolio by adding a fixed-income component to it can help you lower risk. PSU bonds, passive debt funds, etc., are all suitable debt options that can help reduce overall portfolio risk and volatility.

Things to consider when investing in PSU bonds.

• PSU bonds are issued in the denomination of Rs. 1000.
• PSU bonds can have a maturity of 5 to ten years, making them an ideal long-term investment option.[1]
• You can trade PSU bonds with a Demat account or invest in mutual funds like the banking and PSU fund. This is a type of open-ended debt fund that invests 80% of its total assets in debt instruments of banks, public financial institutions, and PSUs.[2]

[1] https://www.bondsindia.com/psu-bonds.html

[2] https://www.sebi.gov.in/legal/circulars/oct-2017/categorization-and-rationalization-of-mutual-fund-schemes_36199.html

Essential considerations for debt mutual funds in India 

In March 2023, the Government of India announced a new amendment to the Finance Bill 2023. Before the announcement, gains from debt funds were subject to short-term and long-term capital gains tax. Gains earned from funds held for less than three years were taxed as per your income tax slab for the year. On the other hand, profits from funds held for more than three years were taxed at 20% with an indexation benefit.

Post the changes, all gains from debt funds with 35% or less of their assets in equities, irrespective of the holding period, will now be taxed at your income tax slab rate for the concerned year. There will also be no indexation benefit, which could earlier reduce the taxability by accounting for the change in the investment cost due to inflation.  

Who should invest in public sector bonds?

Now that you know what are PSU and the PSU stock full form, let us consider who should invest in public sector bonds. PSU stock full form public sector unit bonds are an attractive investment option for a certain profile of investors, primarily due to their relatively low-risk nature and steady returns. Conservative investors who prioritise capital preservation and are risk-averse are ideal candidates for investing in PSU bonds. Since you know what are PSU, you have a robust understanding of the safe nature of these bonds. Therefore, they are suitable for individuals nearing retirement or retirees who need a reliable income stream without exposing their savings to high volatility. Additionally, PSU bonds can appeal to high net-worth individuals seeking to diversify their investment portfolio with low-risk instruments that offer stable returns. They also cater to institutional investors such as pension funds, insurance companies, and banks that have a mandate to invest a portion of their funds in secure and liquid assets.

Further, tax-sensitive investors might find PSU bonds attractive, especially those who fall into higher tax brackets. Certain PSU bonds come with tax-free interest income, enhancing the post-tax returns for such investors. This tax advantage makes PSU bonds particularly appealing for long-term financial planning. Moreover, these bonds can be a suitable choice for investors who have a moderate risk appetite but still seek a higher yield than traditional savings instruments like fixed deposits. In addition, individuals who prefer liquidity in their investments might consider PSU bonds since many of them are listed on stock exchanges, allowing for easy buying and selling in the secondary market.

Given that you now have all the details you require before investing, including what are PSU, benefits of PSU bonds, and other aspects, do you think public sector bonds are the right choice for your portfolio?

Conclusion

Investing in PSU bonds can offer several benefits, such as regular income, lower risk, diversification, etc. However, like all investments, there may be some risks involved, and you must carefully evaluate your investment goals before investing in PSU bonds. It is also essential to consider the two ways of investing in them – through a Demat account or in PSU bond mutual funds.  

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