Banking and PSU Funds — A Narrow List of Borrowers, On Purpose

The defining rule is a minimum share of the portfolio in debt issued by banks, public sector undertakings, public financial institutions and similar entities. The remainder can be held elsewhere within the scheme stated limits.

These are typically large borrowers with established access to funding, which is why the category tends to carry high credit quality overall. Our page on debt funds covers the wider family, and corporate bond funds covers the category defined by credit rating rather than by type of issuer.

The distinction between those two is worth holding onto. One category restricts by who the borrower is. The other restricts by how highly the borrower is rated. They overlap heavily in practice and are not the same rule.

This is the misunderstanding most worth correcting, because the word public does a lot of reassuring work it has not earned.

A public sector undertaking is a company with government ownership. It is not the government itself, and its bonds are its own obligations rather than obligations of the state. Some carry explicit backing, many do not, and the market treats them accordingly.

Government securities proper sit in a different category, which our page on gilt funds describes. Banks, for their part, are regulated institutions with their own balance sheets, and bank paper can itself come in forms with quite different risk characteristics.

So the honest description is that this category lends to borrowers widely regarded as strong, which is a meaningful statement and a narrower one than people assume.

The borrower list addresses credit risk. It does nothing about the other risk in any debt holding.

When general borrowing rates rise, the market price of existing bonds falls, and the scheme is valued at market prices every day. A banking and PSU scheme can therefore show a decline over months without any borrower missing anything, which is the same mechanism our page on gilt funds explains.

How much it moves depends on how long its holdings run, which varies between schemes in the category. Our page on short duration funds covers why the maturity profile decides so much of a debt scheme behaviour.

Investors who chose this category because the borrower list sounded safe, and then saw a fall, are almost always meeting interest rate risk rather than a credit problem.

Three numbers tell you most of what you need, and they are all published monthly.

The share actually held in the defined issuers, which may sit comfortably above the minimum or close to it.

The average maturity or duration, which decides how much the value moves when rates change.

The concentration, meaning how much sits with the largest few borrowers. A narrow list of eligible issuers can produce a portfolio more concentrated than a broader debt scheme, and knowing that matters.

Our page on the fact sheet shows where each of these sits.

Typically households wanting the stable portion of a portfolio to sit with borrowers they recognise, for a horizon of a few years.

It is also used as a step up from very short-term holdings for money that is not needed immediately but should not take equity risk, and as the source of a transfer plan moving a lump sum gradually into equity.

A retired household using it as part of an income arrangement should also read our comparison of withdrawals against deposit interest, since the two produce monthly money in quite different ways.

Two situations, and they are the same two that apply to most debt categories.

The emergency buffer, which needs to be available at a known value within days. The very short end of the debt ladder, or a deposit, is the honest answer there, as our page on building an emergency fund sets out.

Long-horizon growth money, which does not need a lending arrangement at all. Our page on asset allocation covers why that money belongs on the other side of the portfolio.

And anybody who needs a figure committed in advance should recognise that no debt scheme offers one, which our page on mutual funds versus fixed deposits sets out plainly.

Four checks, and the first is the one that decides whether the category suits you at all.

• Is your horizon at least as long as the scheme maturity profile, so a rate movement has time to pass?
• What does the portfolio actually hold, and how concentrated is it?
• What is the expense ratio, which weighs more in debt because outcome ranges are narrower. See expense ratio.
• What is the tax position at your holding period, which our page on mutual fund taxation covers structurally.

We are distributors rather than investment advisers and we recommend no schemes. Our page on dynamic bond funds covers a debt category defined by the opposite idea, where the manager varies duration. If you want to check what your debt holdings contain, get in touch.