What are Public Sector Undertaking Bonds (PSU Bonds)?
Public sector undertaking bonds are bonds issued by public sector companies and government entities. The Indian Government has more than 50% ownership of PSU bonds, making them one of the safest fixed-income instruments for medium and long-term investments.
In India, public sector undertakings (PSUs) such as the Indian Oil Corporation, Oil and Natural Gas Corporation, Coal India Limited, Bharat Heavy Electricals Limited, etc., issue PSU bonds to acquire funds from the secondary market. The Indian Government has a 51% shareholding capacity, making such bonds the most secure of their kind.
More About PSU Bonds India
PSU bonds denote bonds issued by businesses in the public sector undertaking sector. They are all popular investment vehicles for investors, offering better returns and security. PSU banks, public sector entities in the power and manufacturing sectors and every kind of state government & central PSUs issue these bonds to fund new ventures or projects and maintain healthy liquidity. As these organisations are generally owned and controlled by either the Central Government of India or a state government, they have majority ownership. Thus PSU bonds are immune to default risk, rating risk, and liquidity risk.
The most prominent advantages of public sector undertaking bonds can be listed as follows.
- Higher interest rates
- Nearly non-existent risk o any default
- Secured fixed-income instruments for high-income taxpayers
- Stable annual returns
- Excellent long-term investment options
PSU bonds are safer than any other bond type because governments support them. There are different types of bonds issued by public sector undertakings (PSUs), such as fixed-rate bonds, floating-rate bonds, Sovereign Gold Bonds by the Central Government, 7.75% Government of India savings bonds, inflation-indexed bonds, zero-coupon bonds, bonds with call-or-put options, etc.
Public sector undertaking bonds offer decent coupon rates of 8% to 9%. Therefore, investment bankers and every leading investment expert consider such bonds to be an excellent and secure fixed-income instrument, & a great way to diversify one’s investment portfolio.
Why Should You Invest in PSU Bonds?
Bonds are long-term fixed-income instruments. They offer an excellent yield to investors on maturity, and bonds with good credit ratings come with coupon or interest rates. And, when public sector entities issue bonds, the risks associated with such bonds get neutralised substantially—investors with proper market knowledge label PSU bonds as the safest fixed-income debt instrument.
Three of the biggest reasons why bonds backed by public sector undertakings are ideal long-term securities for investors are:
- The opportunity to pay short-term capital gains tax as per one’s income tax slab
- Much more stable yield curve due to Government backing long with lower volatility levels
- Less vulnerability to market fluctuations
- Primary administrative control is in the hands of the Government
Who Should Invest in PSU Bonds?
PSU bonds are ideal for investors with low-risk tolerance. The decent returns of 8% to 9 % and the security provided by government undertakings can meet the investment needs of different investors with varying risk profiles.
One key thing to note about PSU bonds and Government Sector (G-Sec bonds) is that most of them are sold on a private placement basis to targeted investors such as investment bankers, mutual fund groups, pension fund groups, etc. Furthermore, their coupon rates are determined by a market determined interest rates.
Investment institutions such as investment bankers make PSU bonds available to the public on the open market through usage promissory note. The interest accrued is routinely credited to the buyer’s Demat account.
5 Reasons to Choose PSU Bonds Over Credit Risk Funds
Both credit risk funds and PSU bonds are debt funds. PSU bonds are much safer and better investment options than mutual or credit-risk funds. PSU bonds issued by public sector companies pose low risks and assured returns. For any investor willing to take a few chances, these bonds are outstanding for making long-term profits.
On the other hand, credit risk funds are debt instruments akin to junk bonds, wherein the money is lent to companies with poor credit ratings. While they may come with higher interest rates, the risks are also relatively high. Thus, it is always best to choose PSU bonds over any credit risk fund if you have a low-risk tolerance.
The following 5 points reiterate the key reasons.
- Low-Risk Financial Instrument: State government and Central PSUs back PSU bonds, making them ideal for investors with lower risk-taking capabilities. On the other hand, a credit risk fund involves debt instruments with companies of poor credit ratings, and their very nature makes them riskier.
- Ideal For High-Income Tax Payers: While PSU bonds are not tax-free, they are best for high-income investors. Generic bonds require investors who hold profits for more than three years to pay 20% long-term capital gains tax with indexation benefit. For PSU bonds, you pay short-term capital gains tax as per your income tax slab if you hold on to them for less than three years. Credit risk funds, while being tax-free bonds, come with a dividend distribution tax of 28.84%.
- Invest in a Long-Term Perspective: PSU bonds have an average maturity period of 5 to 10 years and are suitable for medium & long-term investments. On the other hand, credit risk bonds have maturity periods of 3 to 5 years, & are thus prone to short-term fluctuations.
- Better Yields Over Credit-Risk: An interest rate of 8% to 9% makes PSU bonds much more profitable than credit-risk funds, as the risk of junk bonds offsets their high-interest rates. Perpetual bonds issued by public sector undertakings (PSUs) can be considered a constant source of income for investors.
- No Complexity in Investing Bonds: Central PSUs issue these bonds on a private placement basis to targeted investors at market-determined interest rates. Those investors then make them available to the open market through mutual funds or a usage promissory note. The entire process is quite simple, and investors do not need to monitor interest movements & the like. Credit risk funds involve high-risk securities and must be carefully curated by professional fund managers to minimise risks & maximise returns.