PSU Funds Are Losing Traction. Should You Buy The Dip?

After more than a year of stellar returns of 80 per cent on average, Public Sector Undertaking (PSU) mutual funds seem to have lost momentum. The pre-election and budget expectations seemed to have been a key driver of the bullish movement while profit booking post-budget has sparked the slowing down. 

What are PSU Funds? 

PSU funds are thematic funds that primarily invest in government owned companies and financial institutions. Consisting mainly of public sector companies gives them an element of relative safety. However, being a cyclical theme, while the fund may provide long term gains, it tends to be quite volatile. Heavy profit booking often follows a period of strong performance. Says Lokesh Manik, Senior Equity Research Analyst, Vallum Capital Advisors, “Only investors who wish to play market momentum through thematic funds should invest in PSU mutual funds.”

Why Have Returns Been Declining?

Says Soumya Sarkar, Co-Founder, Wealth Redefine, “The performance of PSUs may not be as strong in the future as it has been in the past year as they often lag in efficiency, innovation, and profitability compared to their private counterparts.” Profit margins generally tend to be low for PSUs. Says Sarkar, “If the performance of PSUs does not improve, there is a real risk of value erosion”. 

With the sector rallying and election seasons around, even PSU companies that aren’t as profitable have seen significant valuation rises. Investors are now beginning to question the sustainability of these elevated valuations especially now that elections and budget are past us. Market corrections have led to a decline in PSU mutual fund returns. 

Should You Invest in PSU Funds?

If you are looking for a short to mid-term investment then there is a good likelihood of investing at the wrong point of the cycle right now, triggering significant losses. Says Sarkar, “Recent gains in PSU mutual funds do not guarantee continued performance. Investors who have a long-term investment horizon of at least seven to nine years should consider PSU mutual funds.”