PSU mutual funds are losing steam. Do I withdraw my investment now or should I wait? 

PSU mutual funds are losing steam. Do I withdraw my investment now or should I wait? Are PSU funds going to provide low returns in the near future, or are they likely to rebound? What is the current outlook for these funds?

Manorajan Das, Gurgaon

Reply by Shweta Rajani, Head – Mutual Funds, Anand Rathi Wealth Limited

After offering the highest returns over 1-year periods, PSU theme-based mutual funds have recently lost momentum. PSU as a sector delivered stellar returns of almost 80% in the last year, but returns have slowed significantly in the last 30 days. This run-up may have been driven by expectations of a boost for PSU sectors due to the elections and budget. However, in the post-election and budget phase, these sectors have seen a reasonable amount of profit booking, leading to a slowdown in returns.

Sector funds are inherently cyclical, and heavy profit booking often follows a period of strong performance. If you do not exit at the right time, you may end up investing at the wrong point in the cycle and incur losses. Therefore, it is advisable to avoid investing in this category right now.

Instead, consider diversified sectors like infrastructure, which encompasses nearly 9-10 sectors in its underlying portfolio and currently has minimal speculative activity. The best strategy is to invest and diversify is via diversified mutual fund categories with an asset allocation of about 50% in large-cap, 30% in mid-cap, and 20% in small-cap stocks, allowing investors to spread risk across various sectors and market caps.

PSU-themed funds

It is noteworthy that PSU-themed mutual funds have displayed variances in returns over different periods. Having demonstrated exceptional performance with the highest returns in the one and three-year timeframes, it is notable that these funds have recently provided a comparatively more modest return of approximately 4.34% in the last three months.

In 2024 so far, PSU theme-based funds exhibited an average return of about 43.19%, with the CPSE ETF standing out with a return of around 53.63%. Over the longer term, these funds have delivered impressive returns of 46.78% over three years and 87.36% over one year, respectively.

Over the past three months, it has provided investors with the highest return rate of approximately 9.47%. As of July 2024, the scheme boasted an Assets Under Management (AUM) amounting to Rs 46,793 crore.

In the said period, ICICI Prudential PSU Equity Fund provided a return of 5.44%, with SBI PSU Fund following closely behind with a return of 3.23% in the similar time frame. Notably, Invesco India PSU Equity Fund, being the oldest fund in the category, exhibited a return of 2.82% in the last three months.

Funds at a glance