Should You Invest in These 4 PSU Equity Funds in 2025

According to Prime Minister Mr Narendra Modi's statement last year in the Rajya Sabha, the net profit of PSUs has doubled to Rs 2.50 trillion over the last 10 years. The net worth of PSUs has also witnessed a 79% increase from Rs 9.50 trillion to Rs 17 trillion, as per the Prime Minister. Moreover, the number of PSUs has also gone up from 234 in 2014 to 254 as of February 2024.

Billions of dollars are being poured into ailing PSUs after a slowing disinvestment plan that was intended to reduce the role of state-run businesses. Keeping the nation's interest at the forefront, the government has priorities set for PSUs.

According to a Business Standard report, the government plans to invest about USD 1.5 billion in financial rescue packages for two state-owned firms after failing to sell them to private companies. While in the past, the government envisioned PSU disinvestments, it hasn't been able to achieve the set targets for the respective financial years. Thus, recognising this, there wasn't a mention of the word 'disinvestment' in the Union Budget 2025-26 speech.

The fact is that intensified volatility in the Indian equity market due to simmering geopolitical tensions, macroeconomic uncertainty, and complex asset valuations have posed significant challenges for the government in achieving its disinvestment target. The plan of BPCL's disinvestment was rolled back in 2022. The ongoing privatisation of SCI, CONCOR, and BEML has also been stuck for years over complications of land holdings. Similarly, the sale of a majority stake in IDBI Bank.

The government has now put in abeyance the privatisation of at least nine PSUs, such as Madras Fertilizers, Fertilizer Corp of India, MMTC, and NBCC (India) among others, as per a Business Standard report. The authorities believe that certain PSUs can be overhauled and made profitable, and consequently, help the government earn dividend income. At present, the PSU sector contributes around 15% of India's GDP.

The full market capitalisation of the BSE PSU Index is currently over Rs 51.11 trillion (as of February 28, 2025), and it currently comprises 63 stocks with representation across 10 sectors, viz. finance, power, oil & gas, capital goods, metals & mining, transport, telecom agriculture, etc.

In FY24, the BSE PSU pack of companies posted a net profit of Rs 5.07 trillion compared to Rs 3.43 trillion in FY23. This has come on the back of improvement in operational efficiency, a professional management charting sensible strategy for future growth, and a good track record of executing orders received.

This has been well captured in performance clocked by the BSE PSU - Total Return Index (TRI) in the last few years. The annualised returns of the BSE PSU Index have been particularly appealing over the last 3 years and 5 years period.

Since September 2022, the BSE PSU has accelerated far more than the bellwether index (see Graph 2). Those who invested Rs 10,000 invested in the BSE PSU - TRI have yielded Rs 33,040 as of February 28, 2025 (a CAGR of 27.0%), noticeably higher than the BSE Sensex TRI (which clocked a CAGR of 15.2%).

How Have PSU Equity Mutual Funds Fared

At present, there are 4 actively managed open-ended PSU Equity Mutual Funds, namely:

1. Aditya Birla Sun Life PSU Equity Fund (with assets worth Rs 5,169 crore as of February 28, 2025)

2. SBI PSU Fund (with assets over Rs 4,543 crore as of February 28, 2025),

3. ICICI Prudential PSU Equity Fund (with assets over Rs 2,068 crore as of February 28, 2025)

4. Invesco India PSU Equity Fund (with assets over Rs 1,230 crore as of February 28, 2025)

These PSU Equity Mutual Funds, are mandated to invest in the PSU sector or theme.

In the last six months after the correction of nearly 29% from its August 1, 2024 peak, the PSU Equity Funds have come under pressure. Three out of four PSU equity funds have trailed the BSE PSU - TRI in the last six months.

Even over 1 year, 2 years, and 3 years, many PSU Equity Funds haven't been able to outperform the benchmark, the BSE PSU - TRI. Over 5 years and 7 years period, only 1 out of the 4 schemes, namely Invesco India PSU Equity Fund, has been able to outperform the benchmark index, i.e. generate alpha and compensate investors against the risk taken by smartly playing with the stock and sector weights.

The evaluation of the performance of PSU Equity Mutual Funds across market cycles reveals that PSU Equity Mutual Funds have reasonably protected the downside risk during the bear market phase, i.e. fallen lesser than the BSE PSU - TRI.

However, in the current bull phase (from March 23, 2020, till date), even though PSU Equity Mutual Funds have clocked positive returns, they have underperformed the BSE PSU - TRI and, in certain cases, the returns have been less than the category average of diversified equity funds.

This is because the underlying stock holdings of many of these PSU Equity funds have faced the heat of market meltdowns or drawdowns, and more so in the last couple of months.

The Challenges for PSUs

With the broader market correction, the BSE PSU Index has also not been spared; it has corrected nearly 29% from its August 1, 2024, peak. With the earnings of many PSUs entering the slow lane in Q3FY25, PSUs are under pressure. For PSUs who have shown relatively strong performance, their earning visibility has also reduced amid an uncertain macroeconomic environment and heightened volatility.

In the Union Budget 2025-26, finance minister Ms Nirmala Sitharaman earmarked capital expenditure at Rs 11.21 trillion for the fiscal year 2025-26, which is just 3.1% of GDP. This is below the industry expectation of Rs 11.50 trillion and, therefore, has upset the market and PSU sectors such as railways, defence, as well as infra construction and new-age infrastructure. The non-financial PSU as a result, may be in hot water, barring the power sector PSUs. Note that, higher capex is crucial for PSUs and overall economic growth.

Does It Make Sense to Invest in PSU Equity Funds at This Juncture?

PSUs have made progress in terms of profitability and net worth. PSUs today are contributing effectively to India's GDP. The emphasis on Aatmanirbharta or self-reliance would provide impetus to PSU companies from certain companies such as defence, capital goods, metals & mining, and agriculture, which are the core sectors of the economy. Even PSU banks are expected to benefit as more finance is required to be self-reliant. The cyclical industries from the PSU domain are expected to perform well.

That being said, the fortune of a PSU Equity Fund depends on how astutely the fund manager and his team tabs such opportunities with tactical allocation to the portfolio. Tables 2 and 3 do not make it a compelling proposition to invest in PSU Equity Funds when many have already underperformed the benchmark, the BSE PSU -TRI and there are challenges in play for PSUs in the near term.

There is a high political, macroeconomic and regulatory risk for PSUs. If the government changes and policies change, it may influence their performance. For example, changes in taxes, subsidies, tariffs, input costs, etc., could impact PSUs.

Also, if PSUs do not keep up with the times and innovate, their growth could lag compared to private players.

It should be noted that PSU Equity Funds aren't for the faint-hearted. Given that a dominant portion of their assets are invested in the underlying PSU sector stock, there is a high concentration risk, and the fortune of the fund is closely linked to the performance of the PSU sector.

To benefit from opportunities across a broader gamut of sectors and stock therein, I believe, as an investor, you would be better off with worthy and suitable diversified equity mutual funds.

[Read: 5 Top Performing Equity Mutual Funds Amid the Market Correction]

As a strategy, I suggest following a 'Core & Satellite Approach'. This approach is followed by even some of the most successful equity investors to build a robust all-weather portfolio with the best equity mutual fund schemes at a market high.

The term 'Core' applies to the more stable, long-term holdings of the portfolio, while the term 'Satellite' applies to the strategic portion that would help push up the overall returns of the portfolio across market conditions.

Your 'Core' holding may comprise around 65%-70% of your equity mutual fund portfolio and consist of a large-cap fund, flexi-cap fund, and a value /contra style fund.

Whereas the 'Satellite' holdings of the portfolio can be around 30%-35% comprising of a couple of Aggressive Hybrid Funds and a Mid Cap Fund.

[Read: 5 Mid Cap Funds Down by Over 15% in the Recent Market Correction]

The core and satellite investment strategy may work for you in 2025 and beyond.

In 2025 where you also need to be mindful of your asset allocation, for tactical allocation to equity, debt, and gold - the three key asset classes -- you may also consider investing in one of the best Multi Asset Allocation Funds.

Be smart, invest sensibly and be a thoughtful investor. When in doubt, reach out to your SEBI-registered investment adviser.

Happy Investing!

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Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.