Baroda Banking and PSU Bond Fund NFO – Can we expect up to 9% annualized returns?

Baroda Banking and PSU Bond Fund NFO ReviewBaroda Banking and PSU Bond Fund NFO – Can we expect up to 9% annualized returns?


Baroda Mutual Fund is planning to launch Banking and PSU bond fund. This New Fund Offer would open for subscription on 27th November,2020. This is an open ended mutual fund that predominantly invests in debt instruments of banks, Public Sector Undertakings, Public Financial Institutions and Municipal Bonds. Should you invest in Baroda Banking and PSU Bond Fund NFO? What are the various risk factors associated with such funds? Can we expect up to 9% annualized returns from such funds?

Also Read: Should you invest in Mirae Asset Banking and Fin Services Mutual Fund?

Issue details of Baroda Banking and PSU Bond Fund (NFO)

This is an open-ended equity mutual fund scheme. Here are the NFO issue details.

Baroda Banking and PSU Bond Fund – NFO Issue Details
Scheme Opens 27-Nov-20
Scheme Closes 10-Dec-20
Scheme reopens for continous purchase/sale 24-Dec-20
Minimum investment (Lumpsump) Rs 5,000
Minimum investment (SIP) Rs 500 for 6 months
NAV of the fund Rs 10 during NFO period
Entry Load Nil
Exit Load Nil
Risk Moderate Risk
Max Total expense Ratio (TER) 2.00%
Benchmark Nifty Banking & PSU Low Duration Bond index
Fund Manager Mr. Alok Sahoo (Fixed Income)
Mr. Karn Kumar (Debt)
Ms. Hetal Shah (Debt-
overseas investments)

Download Baroda Banking and PSU Bond Fund SID

What is the investment objective of this MF scheme?

The Scheme seeks to provide regular income through a portfolio of debt and money market instruments consisting predominantly of securities issued by entities such as Banks, Public Sector Undertakings (PSUs), Public Financial Institutions and Municipal Bonds.

There is no assurance or guarantee that the investment objective of the scheme will be realized.

What is the allocation pattern in this mutual fund?

This fund investment pattern is as follows:

Type of instruments Min % Max % Risk Profile
Debt and Money Market Instruments issued by Banks, Public Sector Undertakings (PSUs), Public Financial Institutions (PFIs) and  Municipal Bonds instruments 80% 100% Low to medium
Debt (including government securities) and Money Market Instruments issued by entities other than Banks, PFIs and PSUs instrument 0% 20% Low to medium
Units issued by REITs & InvITs 0% 10% Medium to High

Why to invest in the Baroda Banking and PSU Bond Fund?

Here are a few reasons to invest in such mutual fund schemes.

1) This fund would invest in debt instruments of Scheduled commercial banks, government entities and PSU enterprises. Such funds are considered to be safer compared to corporate bonds that invests in corporate debt instruments which are high risk.

2) This fund aims to invest in short and medium term options (2-5 years). This fund is good for short to medium term investors.

3) Since it invests in banks and PSU debt instruments, it provides high liquidity unlike corporate risk funds which invests in corporate debt papers and are high risk with liquidity issues.

4) Banking and PSU debt funds segment performed well and gave higher returns in the last few years compared to corporate bond funds, dynamic bond funds, medium to long term duration funds etc.,

Also Read: Quant Smallcap fund gave 60% returns in 3 months – Should you subscribe?

Some key risk factors you should consider before you invest in such funds

One should consider some of these risk factors / negative factors before investing.

1) Such funds would have interest rate risks (interest rate increases, bond yield fall and vice versa).

2) While investment in Government enterprises / PSU debt would have zero risk, there is credit risk in commercial bank debt instruments. If the ratings of such commercial banks go down, the value of the bonds invested also would go down. It would invest in scheduled commercial banks that include private sector banks, public sector banks, small finance banks, payment banks and foreign banks that has a presence in India. See what happened earlier for Yes Bank and now to Lakshmi Vilas Bank. Hence, the risk is NOT eliminated.

3) It invests in REITS and InvITs which are considered as high risk.

3) You can refer complete risk factors in NFO Scheme Information documents.

Are Banking and PSU Debt Funds better than other debt funds?

Just see below a snapshot comparing with other debt funds (This table prepared a couple of months back for a mutual fund analysis).

How did the banking and PSU debt funds performed in last 5 years

Performance of existing Banking and PSU Funds

Now, let us look at some of the top performing banking and PSU debt funds in 2020.If you see, these funds gave 7% to 9.4% annualized returns in the last 5 years.

Fund Name 6 month Annualised Returns
1 Year 3 Year 5 Year
Edelweiss Banking and PSU Debt Fund 5.9% 13.4% 10.6% 9.4%
Aditya Birla Sun Life Banking & PSU Debt Fund 5.8% 11.1% 9.2% 9.4%
Kotak Banking and PSU Debt Fund 5.7% 10.7% 9.4% 9.2%
HDFC Banking and PSU Debt Fund 6.0% 10.9% 8.9% 9.1%
Nippon India Banking & PSU Debt Fund 5.4% 11.1% 9.4% 9.1%
Franklin India Banking & PSU Debt Fund 4.6% 9.5% 9.2% 9.0%
SBI Banking and PSU Fund 5.4% 10.7% 9.6% 9.0%
ICICI Prudential Banking & PSU Debt Fund 5.3% 10.0% 8.4% 9.0%
Axis Banking & PSU Debt Fund 5.0% 9.8% 9.6% 9.0%
DSP Banking & PSU Debt Fund 5.0% 10.9% 9.1% 9.0%
L&T Banking and PSU Debt Fund 5.3% 10.7% 9.0% 8.9%
IDFC Banking & PSU Debt Fund 5.5% 11.2% 9.9% 8.9%
PGIM India Banking & PSU Debt Fund 5.2% 10.5% 9.1% 8.9%
LIC MF Banking & PSU Debt Fund 4.6% 9.1% 9.2% 8.7%
Invesco India Banking & PSU Debt Fund 5.2% 9.9% 9.1% 8.2%
Sundaram Banking & PSU Debt Fund 3.7% 7.8% 7.7% 7.7%
UTI Banking & PSU Debt Fund 4.1% 9.1% 4.8% 6.7%

Also Read: 2 Large-Midcap Mutual Funds that outperformed its peers and benchmark

Should you invest in the Baroda Banking and PSU Bond Fund NFO?

Baroda Banking and PSU Bond Fund invests in debt instruments of scheduled commercial banks and PSU enterprises. While investment in debt instruments of PSU enterprises has almost zero risk, investing in bank debt instruments are still risky. Interest rates are expected to further fall for the next few years that would increase the bond yield. In such scenario, investing in debt funds could be the best bet. Even these are better funds compared to corporate debt funds which invests in corporate debt instruments that are considered as high risk. One can expect 7-10% returns from such Banking and PSU Debt funds, though not guaranteed. If you are a moderate risk taker and willing to invest for 3-5 years time frame you can invest in such funds. If you do not want to test with new funds, you can invest in some of the top performing banking and PSU debt funds listed above.

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Suresh KP

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