PSU debt funds. These schemes have the mandate to invest at least 80% of their corpus in debt investments of banks, public sector undertakings, and public financial institutions.
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Mutual fund advisors say banking & PSU debt schemes are ‘relatively’ safe because these schemes invest only in bonds and papers of banks and public sector companies. Since most of these entities are government-backed, they don’t have the credit risk.
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These schemes have become extremely popular after the troubles in the debt mutual fund space three years ago. The debt market was rocked by downgrades and defaults not long ago. Many conservative investors stopped investing in debt schemes because they were scared of getting back their money.
However, this doesn’t mean that these schemes do not have any risk at all. For example, these schemes also invest in papers issued by private banks. Since they don’t have government backing, they carry some risk. However, since banks are highly regulated, the risk is minuscule. Also, interest rate changes can adversely affect these schemes.
A rising or firm interest rate environment is bad for debt funds. However, since these schemes do not invest in very long-duration papers, they