Banking and PSU debt funds returned 4.06% in a year

The year to early June

In the year to Friday 5 June 2026, the median banking and PSU debt fund returned 4.06%. The median liquid fund returned 6.20% in the year to Sunday 7 June.

A banking and PSU fund lends mostly to banks, public sector companies and public financial institutions. SEBI requires at least 80% of the portfolio in that kind of paper. The issuers are among the strongest borrowers in the country, so the credit risk is low. The interest-rate risk is not, because nothing in the rules limits how long the bonds can be.

All figures come from daily NAVs, Direct plan, Growth option. The 20 banking and PSU funds report NAVs dated 5 June. Liquid funds publish for every calendar day and all report 7 June, so their figures run two days later; over a year that makes no meaningful difference.

How it compares

Two things stand out.

The last year cost these funds about two points against liquid funds. Banking and PSU funds and corporate bond funds finished almost exactly level with each other, at 4.06% and 4.07%, and both well behind the liquid median.

Over three and five years there is no gap to speak of. The median banking and PSU fund compounded at 6.96% a year over three years, the same as the median liquid fund, and at 6.11% over five against 6.15%. It did that with nearly six times the volatility.

Why the year was weak

These funds own bonds with years left to run, so their NAVs fall when market yields rise. NSE's Nifty Composite G-sec Index, which includes interest, returned only 0.85% over the year to 5 June, and the clean price of its 10-year benchmark index, which strips the interest out, fell 6.06%. Government bonds are not what these funds hold, but they set the level that bank and PSU bonds are priced from.

The last three months were the weak stretch. The median banking and PSU fund returned 0.78% from early March to 5 June. That is absolute, for 92 days, and scaled up by compounding it is about 3.1% a year, less than half what a liquid fund was earning over the same months.

The last month turned. The median fund returned 0.56% in the month to 5 June, slightly ahead of liquid funds' 0.52%, and the composite government bond index rose 0.79% in the same month.

The funds

Two of the bottom three are the two most volatile funds in the category, and DSP's fund, last over the year, is the most volatile of all. Its worst fall from a peak in three years, 1.09%, is also the deepest. In a year when bond prices fell, the funds whose NAVs swing most did worst. That usually means longer bonds.

The spread is modest. From best to weakest is 2.69 points over the year, and the middle half of the category spans 3.75% to 4.44%.

One five-year figure needs a note. UTI's fund shows 7.47% a year over five years, the best in the category by more than a point. Its NAV rose 6.15% on a single day, 6 May 2022, which falls inside that window. Without it the fund's five-year record would sit near the median.

What this does not tell you

It is not a rate forecast. The year was weak because yields rose. If they fall, longer bonds gain, and the order against liquid funds can reverse.

Low credit risk is not no risk. The rules keep these funds with strong issuers, but a fund can still hold paper that is downgraded.

Past returns don't predict. Three years in which two very different categories tie says the extra risk was not paid this time, not that it never will be.

Tax is at your slab. Gains in a debt fund bought on or after 1 April 2023 are taxed at your income-tax slab rate.

Where to go from here

The banking and PSU fund page lists every scheme with live figures. The guide to the debt fund duration ladder explains why maturity drives these results.

For the credit side of the bond market, see credit risk fund returns in May. For the cash end, see overnight vs liquid vs money market funds.