Public Sector Undertaking Bonds commonly known as PSU bonds offer a blend of stability and returns. Their reliability, stability, and potential for steady returns make them an attractive investment option for investors who are looking for a balance between security and yield. However, navigating the nitty gritty of PSU bonds requires a deeper understanding of their nuances and risk factors. This blog demystifies PSU bonds, which will help an investor, whether a seasoned investor looking to diversify one’s portfolio or a newcomer wanting to learn about fixed-income securities to make informed decisions.
First of all, let us understand what PSU is. PSU stands for Public Sector Undertaking or public sector unit. It is also known as Public Sector Enterprise (PSE). This can be government-owned enterprises, companies owned by the government, statutory corporations, or nationalized companies.
Public Sector Undertakings play a crucial role in driving economic growth in India. These organizations have a substantial share of 51 percent or more capital owned by the government. They are classified as Central PSUs or State PSUs depending on the type of government ownership.
What are PSU bonds?
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.
PSU bonds refer to debt instruments that are usually medium or long-term debt instruments issued by Public Sector Undertakings (PSU) that are under the ownership and administration of the central or state government where the government shareholding is generally more than 51%. These bonds can be ideal for risk-averse investors as they carry a lower risk.
Long-Term Investment– The maturity period of PSU bonds typically ranges between 5-10 years.
Liquidity– PSU bonds are liquid as they can be traded in the secondary market and can be held easily in a demat account.
High Credit Rating– Since the government backs PSU bonds, they have high credit ratings and carry a low risk of default.
Regular Interest Income– PSU bonds provide regular returns to investors.
How do PSU bonds work?
When you invest in a Public Sector Undertaking bond, you contribute money to a bond issued by public sector banks and other entities. The issuers utilize this money for their projects and provide investors with a predetermined fixed return at specified intervals.
Advantages of PSU Bonds
- Consistent Returns– PSU bonds provide stable income to the bondholder.
- Low Risk of Default– Since government entities issue PSU bonds, they carry minimal risk of default in the interest payment and repayment of the principal amount.
- High Yield– PSU bonds offer higher interest rates. The annual returns offered in PSU bonds are at the rate of 8% to 9% which are generally higher than FDs.
- Less vulnerable– Since the government backs these bonds, PSU bonds are less susceptible to market fluctuations.
- Diversification– PSU bonds offer diversification and the means to reduce portfolio risk and increase returns.
- Suitable for High-income Taxpayers– PSU bonds are suitable for high-income taxpayers for taxation reasons. Profits held for over three years face a long-term capital gains tax of 10% long-term capital gains tax without indexation benefits; if it is held for less than three years results in a short-term capital gains tax based on the income slab.
- Long-term Investment Value– These bonds have a maturity period ranging from 5 to 10 years and are suitable for medium and long-term investments. These bonds are a feasible option to generate consistent income over a long period.
Here is a list of some PSU companies in India
- National Thermal Power Corporation (NTPC)
- Oil and Natural Gas Corporation (ONGC)
- Steel Authority of India Limited (SAIL)
- Bharat Heavy Electricals Limited (BHEL)
- Hindustan Aeronautics Limited (HAL)
- Mahanagar Telephone Nigam Limited (MTNL)
- National Aluminium Company (NALCO)
- Oil India Limited (OIL)
- Power Finance Corporation (PFC)
- Shipping Corporation of India (SCI)
- National Insurance Company Ltd
- Rural Electrification Corporation Ltd.
A few of the PSU bonds currently available at The Fixed Income
Why should Investors invest in PSU bonds?
Individuals with a low-risk tolerance are advisable to choose banks and PSU bonds. This is because these bonds are associated with public sector companies and banks, and are backed and operated by the government. Such bonds are suitable for investors facing higher income tax obligations.
Who should invest in PSU bonds?
- Portfolio Diversification– It is a good option to diversify your portfolio and achieve your financial objectives.
- Risk-averse Investors– PSU bonds are suitable for risk-averse investors having a low risk-taking capacity such as senior citizens as these bonds are backed by the government and offer stable returns from 8% to 9%.
- Long Period– PSU bonds are suitable for investors seeking a long-term investment option as these bonds come with a maturity period of 5-10 years. Thus, it is an ideal choice for those looking to invest over an extended period.
- Safety– Investors seeking a secure and safe investment option may find PSU bonds to be a good option, as these bonds are issued by government entities, providing investors with a guarantee and a lower risk of default.
- Source of Income– PSU bonds have the potential to provide consistent income and offer better returns than bank fixed deposits.
- Low risk of Non-payment– The Central Government of India exercises control over the public sector companies issuing PSU bonds, so the perceived risk of non-payment is very low.
In summary, Public Sector Undertaking bonds are crucial for government-backed entities to raise funds for their activities. It is a stable and secure investment option as it provides consistent returns to investors and carries a low risk of default it is backed by the government. Despite their benefits, investors should carefully assess the risk factors before investing in them. In essence, PSU bonds play a vital role in the fixed-income market and contribute significantly to economic growth.
Q1. What are PSU bonds?
Ans. PSU bonds are debt instruments issued by Public Sector Undertakings (PSU) which are owned by the central or state government where the government has a shareholding of more than 51%.
Q2. Are PSU bonds safe?
Ans. PSU Bonds are issued by government-owned undertakings and are backed by the government; hence they are considered relatively safe investment options.
Q3. What is the maturity duration for PSU bonds?
Ans. The maturity duration for PSU bonds ranges between 5 and 10 years.
Q4. Are PSU bonds the same as government bonds?
Ans. PSU bonds are different from government bonds. PSU bonds are debt securities that are issued by Public Sector undertakings where the government has a shareholding of more than 51% whereas government bonds are debt securities issued by the central and state governments.