Public Sector Undertakings (PSU) Bonds: These Hacks Attract Profit
by Mashum Mollah Finance Published on: 03 September 2024 Last Updated on: 01 October 2024
PSU Bonds, also known as Public Sector Undertakings Bonds, offer stability and returns. Investors seeking a balance between security and potential growth are attracted to PSU Bonds due to their reliability and steady performance.
This government-owned business performs functions on the government’s behalf, making it a secure investment. However, this security is only a privilege for those with the proper knowledge of public sector undertakings. Understanding the risks and nuances of PSU Bonds is crucial for navigating this investment option effectively.
The following sections will demystify PSU Bonds, helping seasoned investors and newcomers. The former will find diversifying their portfolios and newcomers interested in fixed-income securities applicable to make informed decisions.
What Are PSU Bonds?
PSU is an acronym for Public Sector Undertaking (or Public Sector Unit). It refers to government-owned companies, statutory corporations, or nationalized enterprises. These Public Sector Undertakings (PSUs) play a significant role in India’s economic growth, with at least 51% ownership by the state.
PSUs are classified into Central PSUs or State Public Sector Enterprises, depending on the level of government ownership.
PSU Bonds have garnered attention recently due to their attractive interest rates, often competing with other investment schemes. PSU bonds are debt securities that public sector enterprises issue, these are either centrally or state-owned.
These bonds are ideal for investors looking to minimize risk, as PSUs typically have over 51% government ownership.
Key Features of PSU Bonds
- Long-Term Investments: PSU Bonds generally have maturity periods ranging from 5 to 10 years.
- Liquidity: These bonds can be easily held in a Demat account, providing good liquidity.
- High Credit Rating: Backed by the government, PSU Bonds usually have a higher credit rating and a lower default risk.
- Regular Income: PSU Bonds offer investors a steady income stream through periodic interest payments.
How to Invest in PSU Bonds?
Investing in PSU Bonds involves purchasing bonds issued by public sector entities or banks.
Investors receive a fixed rate of return, while issuers utilize the funds to finance their projects.
You can even opt to buy from secondary resources such as the following:
- Electronic trading platforms: Financial institutions and banks can offer online platforms that allow investors to buy government bonds in secondary markets.
- Bond funds/GILT mutual funds: Another great way of investing in public sector undertakings is through an indirect way. This entails investing in mutual or bond funds holding government bonds in their portfolio. This helps build a diversified bond portfolio that professional fund managers take care of.
- Stock exchange: These public sector undertakings are listed on stock exchanges. From there, investors like you can buy bonds through trading accounts. You must have registered brokers who can help you with this.
Another great way of investing in these bonds is through a direct way that’s recently available for us investors. An investor can open a Demat account and directly choose public sector undertakings to invest in.
This framework allows individual investors to participate in primary market auctions for government securities. Thus, this makes government bonds accessible for investors.
Benefits of Investing in PSU Bonds
- Steady Income: PSU Bonds provide a consistent stream of income for bondholders.
- Low Risk of Default: Issued by government entities, PSU Bonds carry a low risk of default in terms of interest payments and principal repayment.
- High Yield: PSU Bonds often offer higher interest rates, with annual returns ranging from 8% to 9%, typically better than fixed deposit rates.
- Market Stability: Government backing makes these bonds less susceptible to market fluctuations.
- Portfolio Diversification: PSU Bonds are an excellent way to diversify an investment portfolio, reducing risk and maximizing returns.
- Tax Benefits: PSU Bonds are attractive to high-income taxpayers, as profits held for more than three years are subject to a long-term capital gains tax of 10% without indexation. For profits held for less than three years, taxation is based on income.
- Long-Term Investment Value: PSU Bonds are ideal for medium to long-term investments, providing a reliable income over an extended period.
List of Prominent Indian Public Sector Undertakings
- 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
- Power Finance Corporation (PFC)
- Shipping Corporation of India
- National Insurance Company Ltd.
- Rural Electrification Corporation Ltd.
Why Should Investors Consider PSU Bonds?
PSU Bonds are particularly suitable for individuals with a low risk tolerance. These bonds are linked to public sector companies, banks, and other government-backed institutions, making them ideal for investors with higher income tax obligations.
These bonds are safer than other investment options that depend on the stock market – such as mutual or credit-risk funds. An investor is also assured returns that are amiss in other options. Lastly, investing in these bonds gives you guaranteed long-term profits that work wonders for your financial stability.
Top Reasons to Invest in PSU Bonds
- Portfolio Diversification: PSU Bonds help achieve financial goals by diversifying investment portfolios.
- Low-Risk Tolerance: PSU Bonds are suitable for risk-averse investors, such as senior citizens, due to their government backing and stable returns of 8-9%.
- Long-Term Investment: With maturities ranging from 5 to 10 years, PSU Bonds are an excellent option for long-term investment.
- Safety: Investors seeking a safe investment option can rely on PSU Bonds, as government agencies issue them and carry a reduced risk of default.
- Regular Income: PSU Bonds offer a steady income stream, with returns often outperforming fixed deposit bank accounts.
- Low Risk of Nonpayment: Given the high level of control the Central Government of India has over the PSUs issuing these bonds, the perceived risk of nonpayment is shallow.
Are You Ready to Invest?
Public Sector Undertakings Bonds (PSU Bonds) are crucial for government-supported entities to raise funds for their operations. Thanks to government backing, these bonds provide a stable and secure investment option with consistent returns and low default risks.
However, investors should carefully consider the risks before investing. PSU Bonds play a significant role in the fixed-income market and contribute to the country’s broader economic growth.
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