Public sector undertakings, or PSUs, have played a crucial role in India's growth story over the decades. Several key sectors, such as energy, banking, mining, industrials, etc., are dominated by large PSUs that are strategically important for the economy. While individual PSU stocks can experience volatility depending on various factors, history shows that PSUs have grown in tandem with the country's progress as a group.
For investors looking to create long-term wealth through equity funds, PSU-focused mutual funds present an opportunity to participate in India's growth while balancing risk. In the section below, we'll discuss the reasons for investing in PSU equity funds.
1. Steady Growth Phase
India achieved impressive GDP growth rates, averaging around 7% annually over the last decade. This scaling up of the economy translated to expansion for PSUs as well. Whether ONGC increased hydrocarbon output, Coal India raised coal production, or banks expanded their branch networks nationwide, PSUs grew their businesses and balance sheets significantly in this period.
Mutual funds that concentrated their holdings in steadily growing large-cap PSU companies saw decent returns over the long run. The Aditya Birla Sun Life PSU Equity Fund is one such scheme, which delivered over 10% annualised returns in the 10 years ending 2021.
2. Robust Future Potential
India's GDP is projected to reach $5 trillion by FY2026, making it one of the top 3 economies globally. Several studies also point to India becoming a $10 trillion economy by 2030. This scale-up brings vast opportunities for infrastructure development, rapid urbanisation, renewable energy growth, defence indigenisation, etc. - all areas where PSUs are expected to play a significant role.
The proposed government divestment and asset monetisation programs also aim to unlock value from PSU holdings over the coming years. Therefore, mutual funds investing predominantly in PSUs are well positioned to generate equity-like returns riding on India's structural growth story in the foreseeable future.
3. Diversification Benefits
Most PSU mutual funds take a diversified approach, allocating across 20-30 stocks spread over 10-15 sectors. This reduces stock-specific risks compared to investing in individual PSU companies. Sectors like banking, energy, mining, defence, etc., have low correlations, thereby balancing volatility. For example, the Aditya Birla Sun Life PSU Equity Fund holds top companies like SBI, NTPC, ONGC, Power Grid Corporation Of India Ltd, Coal India etc. thereby providing risk-mitigated exposure to India's dominant industries and the stable cash flows they generate. Diversification thus makes PSU funds more suitable for investors with a 3-5 year time horizon than direct stock picking.
Note – Please note that the data of the holdings given is as of on 14th June’24.
4. Downside Protection
A key attribute of PSUs is the majority ownership and operational control of the government of India. This ownership provides an implicit guarantee for timely capital support from the sovereign in case of difficulties. PSU bonds, therefore, command high credit ratings, helping them raise low-cost debt even during crisis periods like the 2008 financial crisis or the 2020 pandemic.
PSU shareholders also benefit from this downside protection, stabilising their stock prices in the long run. PSU mutual funds, in turn, derive ballast from this characteristic, making them relatively less volatile than diversified equity funds through market cycles.
5. Participate in Privatization Gains
The government has recently taken steps to privatize select PSUs like Air India, BPCL, Shipping Corp etc. More such strategic disinvestments are anticipated going forward. This provides an upside for PSU-focused funds as successful privatization often leads to re-rating the stock price to peer private sector valuations, which are usually at a premium to present prices. The re-rating effect spreads across other PSU holdings of such funds as well. History shows PSU stocks witnessing big bumps during past disinvestment events. Participating in these potential one-time gains through a diversified PSU mutual fund is attractive.
6. Downside Risks Addressed
While PSU funds offer stability, their returns can lag during strong market uptrends led by new-age sectors. Fund houses address this by allowing limited flexibilities - the Aditya Birla Sun Life PSU Equity Fund, for instance, may invest up to 20% in non-PSU companies and 10% in REITs/InvITs. This helps participate in broader market moves without compromising the core PSU strategy. Additionally, as government ownership reduces due to gradual divestments, some individual PSU stocks may see slower growth or higher volatility than private sector names. Prudent stock selection and continuous portfolio review by experienced fund managers mitigate such emerging risks over the long run.
The Bottom Line
PSU mutual funds offer Indian investors a stable yet growth-oriented avenue to accumulate wealth by diversifying into sectors crucial to our economy's progress. At reasonable costs, funds like the Aditya Birla Sun Life PSU Equity Fund participate in India's equity story while balancing risk through government ownership characteristics of their holdings. Those with a long 3—to 5-year investment horizon can consider allocating a portion of their equity portfolio towards such PSU-focused funds. The macro factors also point to continued sturdy returns from this strategy in the coming years.