PSU Funds: Govt spending could aid recovery, suited for high-risk takers

Allocate 5-10% in satellite portfolio with five-year horizon

Public sector undertaking (PSU) funds, a top-performing theme in 2024 calendar year (CY24), have witnessed a sharp reversal. In the past year, they have lost an average of 11.3 per cent, the steepest drop among equity fund categories. This includes a 4.7 per cent fall in the past month.

 

“After a stupendous performance in 2024 (up 22.9 per cent), these funds experienced heavy inflows, as investors chased recent high returns. Following strong rallies, many investors booked profits, contributing to downward pressure on PSU stock prices. Also, recent quarters have seen an earnings shortfall that has led to disappointment,” says Devender Singhal, fund manager, Kotak Mutual Fund.

 

“Recently, PSUs saw delays in project execution and policy-led margin pressures, particularly in oil and gas, leading to subdued earnings. Softer gross domestic product (GDP) growth, weaker commodity prices, and slower private capital expenditure (capex) recovery has had an impact,” says Harish Krishnan, co-chief investment officer (Co-CIO) and head equity, Aditya Birla Sun Life Asset Management Company (AMC).

 

Diverse sector exposure

 

PSUs operate in sectors such as energy, metals, defence, financial services, capital goods, logistics, and allied activities. Funds may be actively managed—investing at least 80 per cent in PSU stocks—or passively, tracking indices like Nifty PSE, Nifty India Railways PSU, or Nifty PSU Bank (a subset of banking sector funds).

 

Outlook remains positive

 

Experts see scope for good returns if investments are made at attractive valuations. “We remain structurally and cyclically positive on the PSU sector as we expect a strong recovery in the asset cycle, which, in turn, will result in a robust earnings cycle for the next three years. This is because a PSU asset cycle follows the Government of India (GoI) spending cycle with a two-year lag. This lends confidence that the cycle is not done yet,” says Krishnan.

 

Government backing, reasonable valuations

 

PSUs are expected to do well owing to government backing. Actively managed PSU funds can offer diversified exposure to PSUs, many of which are likely to benefit from policies like Make in India and Atmanirbhar Bharat.

 

“The long-term fundamentals for India’s PSUs remain supported by ongoing government reforms, rising capex and sectoral revival in banking, energy and infrastructure. Current valuations are more reasonable and may provide attractive entry points for long-term investors with moderate risk appetite,” says Singhal.

 

Dividend appeal

 

Many PSUs pay high dividends. These are taxable in the hands of investors. But PSU funds do not pay tax on dividends received and reinvest them, which makes them tax efficient. “PSU funds are well suited for conservative investors seeking steady income (high dividend payouts in general) and lower default risk,” says Singhal.

 

Volatility risk

 

Policy changes can hurt profitability and valuations, limiting capital appreciation. “These funds are vulnerable to change in government policies, which can impact profitability and valuations. Bureaucratic inefficiencies, political influence, and low growth can limit their potential for capital appreciation,” says Singhal.

 

PSUs offer low exposure to high-growth sectors like technology and healthcare.

 

For risk takers

 

Experts say PSU funds suit those with a high risk appetite. “Start with a limited exposure (less than 20 per cent) and increase over time as you gain experience and expertise. In sector and thematic investing, investors need to evaluate cycles, act counter-cyclically, and time entry and exit,” says Jiral Mehta, senior research manager, FundsIndia.

 

Limit your exposure to these funds. “They are better suited as satellite holdings. Allocate 5–10 per cent in your equity portfolio with a holding period of 3–5 years,” says Krishnan. 

 

 

The writer is a Gurugram-based independent journalist