PSU Bonds: All You Need To Know

PSUs (Public Sector Undertakings) are an integral and critical part of the Indian economy. They are government-owned (or majorly owned) entities operating in core sectors such as petrochemicals, coal, natural gas, and infrastructure development (to name a few). Owing to their history and government backing, PSUs are highly trusted. This is why almost 15% of India’s stock market capitalisation comprises of PSU stocks.¹ 

Besides equity, PSUs also offer bonds which are safe, moderate-return-yielding investment options for risk-averse investors. PSU bonds can also be an excellent alternative for portfolio diversification, providing higher-than-FD returns with minimal default risk.  

This blog will explore PSU bonds, their types, advantages, and how you can invest in them to enhance your financial portfolio.

What Are PSU Bonds?

Let us first understand the PSU bond's meaning. Bonds are debt instruments offered by an entity to raise funds in the form of loans from the general public. Unlike equity shares, where a portion of the company/entity’s ownership is diluted due to such an offer, debt instruments are loans for which the bondholders are paid periodic interest and maturity amounts at the end of the tenure.

PSUs also use bonds to raise capital to fund their operations or long-term growth projects. Since PSUs are owned by the state or central government, these bonds are quite secure and do not involve high risk. 

In the Indian securities market context, PSU bonds are quite popular as they provide alternatives to equity investments and fixed deposits. Hence, if you are an investor looking for moderate to high returns but do not want to assume risks associated with equity, PSU bonds can be the perfect choice for you. 

By purchasing these bonds, investors essentially lend money to PSUs, which in turn use the funds for growth and development in vital sectors such as energy, transportation, and infrastructure. Recently, investor demand for PSU bonds has increased, due to which top public sector companies have issued additional bond issues worth INR 5000 crores.² 

Types Of PSU Bonds

Broadly, PSU bonds can be categorised into Taxable (General) Bonds, Tax-Free Bonds, and Infrastructure Bonds. Each bond category has its own features and advantages, which is presented in the following table:

Example: Mr. Rahul Sharma has recently earned LTCG (Long Term Capital Gain) of INR 18 lakhs as he sold a plot of land. As part of tax planning, he decided to invest the amount of gain in the PSU bond issued by Rural Electrification Corporation Limited. Here is how his taxability would be affected:

Investment in infrastructure bonds by Mr. Rahul not only resulted in saving capital gain tax but also received moderate earnings from his PSU bonds. 

Who Issues PSU Bonds?

A PSU (Public Sector Undertaking) with at least 51% or more government ownership can come up with a bond issue. These entities operate in different core areas, such as energy, infrastructure, and finance. 

Some of the popular PSUs that offer bonds include: 

1. Power Finance Corporation (PFC) (Rated AAA): To provide financial assistance in the power sector.

2. Rural Electrification Corporation (REC) (Rated AAA): To focus on financing the low-profit (but critical for the economy) rural electrification projects.

3. National Highways Authority of India (NHAI) (Rated AAA): To raise funds for developing and maintaining national highways. 

4. Indian Railway Finance Corporation (IRFC) (Rated AAA): Raises funds for the Indian Railways. 

5. Housing and Urban Development Corporation (HUDCO) (Rated AAA): Finances housing and urban infrastructure projects. 

6. State Bank of India (SBI) (Rated BBB): The largest public sector bank that issues various bonds.

PSU Bonds: Advantages And Disadvantages

Here is a table depicting the pros and cons of PSU bonds:

To balance your portfolio with safety and returns, you can buy corporate bonds as well along with PSU bonds. These bonds will help you earn higher returns than PSU bonds. However, they come with certain risks. To analyse the risk, you should look for the credit rating of the corporate bond and then choose the one that best suits your risk appetite.

How Can One Invest In PSU Bonds?

You might be interested in knowing how to buy PSU bonds in India. You can take the direct route by looking at the list of PSU bonds and choosing the one that meets your requirements. You can select a mutual fund that further puts your money in a PSU bond. You can also invest through brokers and the secondary market (only tradable PSU bonds). There is always the option of direct investments through new offerings by PSU companies. 

Eligibility varies by bond type, but most are open to individual and institutional investors. Costs typically include brokerage fees or transaction charges on exchanges. It is, however, highly recommended that you take into account bond credit rating, tenure and applicable coupon rate. Online trading platforms and new-age brokerage houses provide easy access to these bonds.

Four Reasons To Choose PSU Bonds Over Credit Risk Funds

Compared to credit risk funds, an investment in PSU bonds can be quite beneficial due to the following factors:

1. The Risk Levels Are Low

Compared to the constant volatility and fluctuations (of returns) in the case of credit risk funds, these funds are quite stable. If you have a low-risk appetite, choosing PSU bonds is the best alternative because the government backs these funds.

2. Suitable For Taxpayers In High Slab 

If you fall into a high-income tax slab rate, investing in PSU bonds is suitable as you will end up paying capital gains tax (if the holding period is more than a year). If you invest in a few PSU bonds within the stipulated time period, you can also save on LTCG on other assets. Hence, PSU bonds can be an excellent option for tax planning purposes. 

3. Long-Term Investment Perspective

Compared to government securities, which have a lower yield and investment period, PSU bonds can be an excellent long-term option. You can expect decent returns for a period between 3 and 5 years. 

4. No Complexity In the Investing Process

You do not need any investment experience or market exposure to start your investment journey with PSU bonds. Since these are backed by government entities, your money is secure and returns are guaranteed. 

Conclusion

If you are looking for a safe investment alternative that provides a fair bit of return along with multiple tax benefits, PSU bonds could be the best option for you. They can help attain long—and short-term financial goals. Even though they are ideal for risk-averse investors, anyone can use them for portfolio diversification purposes. 

By carefully evaluating the bond’s features and aligning them with your financial goals, PSU bonds can be an excellent addition to a balanced investment portfolio.

Frequently Asked Questions On PSU Bonds

1. Can you exit your PSU Bond Investments before maturity?

Yes, you can exit PSU bond investments by selling them in the secondary market if they are listed. 

2. Who Should Invest in PSU Bonds?

Risk-averse investors seeking stable returns and portfolio diversification should consider PSU bonds. 

3. Are PSU bonds and state government bonds the same?

No, PSU bonds are issued by public sector undertakings, while state government bonds are issued by individual state governments.

References:

1. https://economictimes.indiatimes.com/markets/stocks/news/psus-m-cap-grows-by-4-in-2-years-now-comprises-15-of-indias-total-market-capitalisation/articleshow/112736511.cms?from=mdr
2. https://www.business-standard.com/companies/news/psus-set-to-issue-long-term-bonds-worth-rs-5-000-cr-to-meet-investor-demand-124082200720_1.html

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