Understanding PSU Mutual Funds: Why Are They Growing?

Public Sector Undertakings (PSUs) are companies owned by the government. For a long time, these stocks were considered slow-moving. However, in the last three years, thematic PSU funds have become some of the biggest wealth creators, giving 3-year average returns of approximately 27.59%.

In this blog, we will look at why these funds are performing well, which funds are leading the way, and what risks you should know.

Why are PSU Funds performing so well?

The growth of PSU companies is not accidental. It is driven by three main factors:

1. Government Spending (Capex)
In the Union Budget 2021-22, central capital expenditure was pegged at ₹5.54 lakh crore. By Union Budget 2025-26, this had risen to ₹11.21 lakh crore, equal to 3.1% of GDP. Public sector banks have also improved sharply, with gross NPAs falling from 9.11% in March 2021 to 2.58% in March 2025, while aggregate net profit reached a record ₹1.78 lakh crore in FY2024-25. In defence, India recorded production of about ₹1.27 lakh crore in FY2023-24, while exports rose to ₹23,622 crore in FY2024-25.

2. The Banking Turnaround
PSU banks have seen a major improvement in their financial health.

• Lower Bad Loans: Gross Non-Performing Assets (NPAs), or loans that aren't being paid back, fell from 7.3% in FY22 to 2.6% in FY25.
• Record Profits: In FY25, these banks generated a record net profit of ₹1.78 lakh crore.

3. Defence Production
Under the "Aatmanirbhar Bharat" initiative, India is focusing on making its own defence equipment.

• Defence production has crossed ₹1.54 lakh crore in FY 2024-25.
• Defence Exports have reached over ₹23,000 crore.
  This has turned Defence PSUs into strong growth engines for the economy.

Comparing Performance: PSU vs. Other Categories

PSU funds have outperformed other common fund categories over the last three years:

Things to Keep in Mind (Risks)

While the returns look high, you should approach PSU funds with a balanced view:

• Not a "Bubble," but Not "Cheap": The growth is based on real reforms and better balance sheets, but stock prices are no longer as low as they used to be.
• Execution is Key: Future returns will depend on how well these companies execute their projects and orders.
• Higher Volatility: Because these are "thematic" funds (focusing only on one sector/theme), they are riskier and more volatile than diversified funds like Flexi Cap or Multi Cap funds.
• Portfolio Strategy: Financial experts often suggest keeping thematic funds as a "satellite portfolio." This means they should only be a small part of your total investment, while the majority stays in diversified funds.

Conclusion

PSU funds have moved from being "boring" to being top performers due to government infrastructure pushes and better bank management. However, because they are thematic and valuations have risen, they require a disciplined and cautious approach for long-term investors.

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