The PSU (Public Sector Undertaking) sector in India has been gaining significant investor traction with the advent of Modi 3.0, the third term of Prime Minister Narendra Modi’s administration.

Public Sector Undertakings (PSUs) have long been the backbone of India’s industrial landscape, playing a crucial role in the nation’s economic development. These government-owned corporations span across various sectors, including oil and gas, banking, power, mining, and infrastructure.

India’s PSU sector encompasses a diverse range of companies that contribute substantially to the country’s GDP. These entities have historically been instrumental in driving industrial growth, ensuring the availability of essential services, and creating employment opportunities.

[Read: 5 Best Mutual Fund Types to Benefit During Modi’s Third Term]

PSUs hold a dominant position in strategic sectors like oil and gas (e.g., ONGC, Indian Oil Corporation), power (e.g., NTPC, Power Grid Corporation), and mining (e.g., Coal India, NMDC). PSUs have been pivotal in implementing social welfare programs, supporting infrastructure development in rural areas, and contributing to community development.

Despite their importance, PSUs have faced challenges such as bureaucratic inefficiencies, outdated technology, and limited autonomy. These issues have often hampered their competitiveness and growth potential in a rapidly changing global market.

With the advent of the Modi 3.0 government, there is a renewed focus on transforming the PSU sector, making it more competitive, efficient, and aligned with global standards. Having said that, investing in PSUs can offer investors a chance to tap into the growth potential of these established entities.

[Read: 4 Equity Mutual Funds Focused on Investing in PSU Stocks]

Understanding PSU Mutual Funds

Public Sector Undertaking (PSU) mutual funds fall under the thematic category and primarily invest in equity and equity-related instruments of government-owned companies across various sectors. PSU funds are designed to capture the potential of these enterprises, leveraging their strong fundamentals and often significant roles in the Indian economy.

Investing in public sector undertakings (PSUs) offers a unique opportunity for investors to participate in the growth of government-owned enterprises. These companies often hold strategic importance in the economy and can offer stable returns due to their established market positions. Two prominent funds in this category are the SBI PSU Fund and the Aditya Birla Sun Life PSU Equity Fund.

This article provides an in-depth comparison of these two funds, analyzing their investment strategies, performance, risk factors, and suitability for different types of investors, to aid you in making an informed investment decision.

# – SBI PSU Fund

SBI PSU Fund is an open-ended equity scheme that belongs to SBI Mutual Fund. It is a well-established thematic fund launched in July 2010 and currently has an AUM of Rs 3,071.30 crore (as of May 31, 2024).

The scheme aims to provide investors with opportunities for long-term growth in capital along with the liquidity of an open-ended scheme through active management of investments in a diversified basket of equity stocks of domestic Public Sector Undertakings (and their subsidiaries) and debt and money market instruments issued by PSUs and others.

# – Aditya Birla Sun Life PSU Equity Fund

Aditya Birla Sun Life PSU Equity Fund is an open-ended equity scheme and belongs to ABSL Mutual Fund. Launched in December 2019, it is a popular thematic scheme that emphasizes the PSU segment and currently holds an AUM of Rs 4,711.18 crore.

Aditya Birla Sun Life PSU Equity Fund is benchmarked against S&P BSE PSU – TRI as a primary index. The scheme aims to provide long-term capital appreciation by predominantly investing in equity and equity-related securities of public sector undertakings (PSUs) in India.

Investment Style and Philosophy:

• SBI PSU Fund: the veteran follows a strategy that focuses on investing in companies where the government has a significant stake. These companies span various sectors, including banking, oil and gas, power, metals, and capital goods. The idea is to benefit from the performance and potential growth of these companies, often driven by government initiatives and economic policies.The portfolio typically includes a mix of large-cap and mid-cap PSU stocks. It is designed to capitalize on the growth prospects of these companies, which often enjoy strategic importance in the Indian economy. This strategy prioritizes stability and income generation, potentially offering lower volatility compared to its peers.
• Aditya Birla Sun Life PSU Equity Fund: invests in a diversified portfolio of PSU stocks across various sectors like banking, energy, mining, and other industries where the government has a significant ownership stake. The selection of stocks is based on rigorous fundamental analysis, with a focus on identifying companies with strong growth potential, solid management, and sound financial health.This relatively younger fund adopts a more growth-oriented approach. It focuses on a mix of large-cap and mid-cap PSUs, with a tilt towards companies with higher growth potential. This strategy could lead to increased volatility but also the possibility of higher returns.

Both SBI PSU Fund and Aditya Birla Sun Life PSU Equity Fund aim to generate long-term capital appreciation by investing in a diversified basket of PSU stocks. However, they exhibit some key differences in their investment philosophies.

• Performance Comparison: Rolling Returns

  Scheme Name	Absolute (%)	CAGR (%)
  	1 Year	3 Years	5 Years	7 Years
  Aditya Birla SL PSU Equity Fund(G)-Direct Plan	65.51	36.85	–	–
  SBI PSU Fund(G)-Direct Plan	63.47	21.60	6.57	7.16
  PSU – Category Average	51.68	21.82	–	–
  Benchmark – S&P BSE PSU – TRI	67.85	24.65	6.03	6.57

  Data as of June 28, 2024
  Do note past performance is not an indicator of future returns
  The securities quoted are for illustration only and are not recommendatory.
  (Source: ACE MF, data collated by PersonalFN Research)  

  As we can see from the above table, both SBI PSU Fund and Aditya Birla Sun Life PSU Equity Fund have outperformed their benchmarks, across all timeframes. However, it's crucial to remember past performance is not a guarantee of future results.

  Here, Aditya Birla Sun Life PSU Equity Fund has taken the lead offering higher returns in the past three years as compared to its peer and benchmark returns. However, the Aditya Birla Sun Life PSU Equity Fund does not have performance data for five and seven years, but its recent performance suggests a more aggressive and potentially rewarding investment strategy.

  Whereas SBI is the veteran in the PSU funds category and has generated decent returns in the long run. SBI PSU Fund's focus on large-caps might have resulted in lower returns but potentially with less volatility.

  Overall, the Aditya Birla Sun Life PSU Equity Fund appears to be an attractive option as compared to the SBI PSU Fund for investors seeking robust short to medium-term gains in the PSU sector.

  The fortunes of these funds are heavily tied to the performance of the PSU sector. Any headwinds faced by the sector can significantly impact their NAV. Moreover, past performance should not be the only element, it's important to note that one may consider other factors like portfolio holdings, risk profile, and investment philosophy before making a decision.

• Portfolio Composition: Asset Allocation of Schemes

  Both SBI PSU Fund and Aditya Birla Sun Life PSU Equity Fund are popular choices for investments in infrastructure sector-oriented funds, but their asset allocation strategies differ slightly.

  Scheme Name	Large Cap %	Mid Cap %	Small Cap %
  Aditya Birla Sun Life PSU Equity Fund	61.54	22.22	9.24
  SBI PSU Fund	44.16	25.32	20.45

  Data as of May 31, 2024
  Do note past performance is not an indicator of future returns
  The securities quoted are for illustration only and are not recommendatory.
  (Source: ACE MF, data collated by PersonalFN Research)  

  Both Aditya Birla Sun Life PSU Equity Fund and SBI PSU Fund focus on investing in public sector companies (PSUs), but their approach to diversification within that sector differs.

  Aditya Birla Sun Life PSU Equity Fund leans more towards large-cap PSUs with a 61.54% allocation. Large-cap PSUs are typically established companies with a longer track record and potentially lower risk. This fund also has a decent allocation to mid-cap PSUs (22.22%) and a smaller portion to small-cap PSUs (9.24%). Mid-caps offer a balance between growth potential and stability, while small-caps have the potential for higher returns but also carry greater risk.

  SBI PSU Fund, on the other hand, has a more balanced approach across market capitalizations. While they still invest heavily in large-cap PSUs (44.16%), they allocate a larger portion to mid-caps (25.32%) and a significant amount to small-cap PSUs (20.45%). This strategy offers potentially higher growth prospects but also exposes the fund to greater volatility compared to the Aditya Birla Sun Life PSU Equity Fund.

  ABSL PSU Equity Fund's higher allocation to large-cap stocks suggests a potentially more conservative approach targeting stability and income. Whereas, SBI's higher small-cap allocation indicates a growth-oriented strategy that might generate potentially higher returns but also carry higher risk.

• Market Volatility: Risk profile of Schemes

  Investing in sectoral funds may offer benefits from the growth potential of the underlying sector like – Infrastructure, however, understanding the scheme's risk-reward profiles is crucial before investing.

  Risk Ratio	Aditya Birla Sun Life PSU Equity Fund	SBI PSU Fund
  Standard Deviation (3 Year)	20.29	20.92
  Sharpe	0.45	0.42
  Sortino	1.10	1.00

  Data as of May 31, 2024
  Do note past performance is not an indicator of future returns
  The securities quoted are for illustration only and are not recommendatory.
  (Source: ACE MF, data collated by PersonalFN Research)  

  An investment with high volatility is considered riskier than an investment with low volatility; the higher the Standard Deviation, the higher the risk. Both Aditya Birla Sun Life PSU Equity Fund and SBI PSU Fund exhibit similar levels of risk, as measured by standard deviation. Their 3-year standard deviations are 20.29 and 20.92, respectively. This indicates that the price of both funds fluctuates to a similar degree.

  However, when it comes to rewards relative to risk, Aditya Birla Sun Life PSU Equity Fund appears to be a slightly better option. Its Sharpe Ratio of 0.45 is slightly higher than the SBI PSU Fund's 0.42. The Sharpe Ratio measures risk-adjusted returns, with a higher value indicating better reward for the level of risk undertaken.

  The Sortino Ratio focuses on downside risk, and a higher value suggests potentially lower exposure to negative returns. With a Sortino Ratio of 1.10 for the Aditya Birla fund compared to 1.00 for the SBI fund, it shows that the Aditya Birla Sun Life PSU Equity Fund has been more efficient in generating returns for each unit of downside risk taken.

  Remember, this comparison is just to give you an idea about the risk profile of the two best PSU mutual funds. Consider your risk tolerance and investment goals to determine which fund aligns better with your investment strategy.

• Top Holdings of the Schemes:

  While both SBI PSU Fund and Aditya Birla Sun Life PSU Equity Fund invest in the infrastructure sector, their specific holdings and sector allocation reveal some key differences:

  SBI PSU Fund		Aditya Birla Sun Life PSU Equity Fund
  Company	% Assets	Company	% Assets
  State Bank Of India	10.48	State Bank Of India	10.14
  Power Grid Corporation Of India Ltd.	5.94	NTPC Ltd.	7.34
  NTPC Ltd.	5.08	Oil & Natural Gas Corporation Ltd.	5.81
  Coal India Ltd.	4.40	Power Grid Corporation Of India Ltd.	5.24
  Housing & Urban Development Corporation Ltd.	3.88	Bank Of Baroda	5.06
  REC Ltd.	3.72	Coal India Ltd.	5.00
  Hindustan Copper Ltd.	3.58	GAIL (India) Ltd.	4.98
  Steel Authority Of India Ltd.	3.35	Bharat Electronics Ltd.	4.49
  Hindustan Petroleum Corporation Ltd.	3.20	Bank Of India	4.27
  Hindustan Aeronautics Ltd.	3.17	NMDC Ltd.	3.88

  Data as of May 31, 2024
  Do note past performance is not an indicator of future returns
  The securities quoted are for illustration only and are not recommendatory.
  (Source: ACE MF, data collated by PersonalFN Research)  

  Both SBI PSU Fund and Aditya Birla Sun Life PSU Equity Fund focus on investing in large Public Sector Undertakings (PSUs) in India. While both funds have significant exposure to the State Bank of India, their top holdings and sector allocations show slight variations.

  Looking at the broader sector allocation, both funds appear well-diversified within the PSU domain. SBI PSU Fund has a higher allocation towards banking PSUs, with State Bank of India being its top holding followed by other banks like Bank of Baroda and Bank of India. SBI's exposure to Coal India Ltd. and Housing & Urban Development Corporation Ltd. suggests a slightly broader exposure to sectors beyond traditional power and energy companies.

  Aditya Birla Sun Life PSU Equity Fund, on the other hand, has a higher allocation towards NTPC and Oil & Natural Gas Corporation (ONGC). Additionally, they hold Bharat Electronics Ltd. and GAIL (India) Ltd. which are not present among the top holdings of the SBI PSU Fund. This indicates a tilt towards the power and energy sector within the PSU universe.

  This subtle difference in sector focus within the PSU space could influence the funds' performance based on how those specific sectors perform.

• Expense Ratio of the Schemes

  When comparing thematic funds, the Expense Ratio, which represents the annual fee charged, plays a crucial role in determining your returns. Here's a quick breakdown of SBI PSU Fund vs Aditya Birla Sun Life PSU Equity Fund:

  Scheme Name	Direct Plan Expense Ratio	Regular Plan Expense Ratio
  SBI PSU Fund	0.82%	1.96%
  Aditya Birla Sun Life PSU Equity Fund	0.45%	1.82%

  Data as of May 31, 2024
  Do note past performance is not an indicator of future returns
  The securities quoted are for illustration only and are not recommendatory.
  (Source: ACE MF, data collated by PersonalFN Research)  

  As you can see, Aditya Birla Sun Life PSU Equity Fund has a significantly lower expense ratio for both direct and regular plans. Even a small percentage point difference can accumulate over time and impact your returns.

  SBI PSU Fund's higher expense ratio could have an impact on the investor's actual returns and thus, many may find ABSL PSU Equity Fund as a cost-effective option. Remember, a lower expense ratio translates to potentially higher returns over time, but a lower expense ratio should not be the only factor to be considered while investing in sectoral funds.

• Suitability of Investors to the Schemes:

  SBI PSU Fund is suitable for investors looking for a diversified portfolio of PSU stocks with a bottom-up stock selection approach. It's ideal for long-term investors with a moderate to high-risk appetite. The fund offers a chance to invest in a variety of public sector companies, providing a balanced approach to capital appreciation and stability.

  Aditya Birla Sun Life PSU Equity Fund is suitable for investors looking to diversify their portfolio with exposure to PSU stocks. It provides an opportunity to invest in government-backed companies which might offer stability and growth potential backed by governmental support and policies.

  The performance of these funds is heavily tied to the PSU sector. If PSUs perform well, the funds will likely see good returns. However, the PSU sector can also be sluggish or volatile, leading to potential losses. Investors comfortable with this inherent risk might consider these funds.

  Both the Aditya Birla Sun Life PSU Equity Fund and the SBI PSU Fund are suitable for long-term investors with a high-risk tolerance who believe in the growth potential of Indian PSUs. The Aditya Birla fund, with its slightly lower volatility and better risk-adjusted returns, might be more appealing to those seeking a slightly more stable investment.

  However, do note these funds focus on carrying a concentrated portfolio related to a specific sector. Ensure they complement your existing portfolio allocation to spread risk.

The Road Ahead for India’s PSU Sector

With the Indian economy on a growth trajectory, PSUs, which are integral to the nation’s infrastructure and development projects, stand to benefit significantly. The government’s emphasis on infrastructure development, including roads, railways, and power, has increased the earnings potential of PSUs involved in these sectors.

The Modi 3.0 government has set the stage for transformative changes in the PSU sector with a focus on efficiency, modernization, and privatization. Key policy measures and initiatives likely to shape the future of PSUs include new policy reforms, technological upgradation, focus on green/renewable energy, global expansion, etc.

The future outlook for India’s PSU sector under the Modi 3.0 government appears promising, as policy framework and strategic initiatives hold the potential to rejuvenate India’s PSU sector, making it more dynamic, competitive, and aligned with global standards.

By addressing longstanding challenges and capitalizing on new opportunities, the PSU sector can play a pivotal role in driving India’s economic growth and development in the coming years. Investors, stakeholders, and policymakers will keenly observe the sector’s transformation as it navigates through this exciting phase of reform and modernization.

To summarise…

Investing in India’s PSU sector presents a compelling opportunity for savvy investors looking towards the future. With robust government backing, strategic expansions, and a pivotal role in the nation’s infrastructure and growth plans, PSUs are poised for significant growth.

Investing in India’s PSU sector through funds like the SBI PSU Fund and Aditya Birla Sun Life PSU Equity Fund investors seek exposure to government-owned enterprises. These funds leverage the strengths of PSUs, which often include established market positions, strategic importance in key sectors of the economy, and potential for stable growth.

However, careful research and consideration of your risk tolerance are crucial before investing in any sectoral/thematic fund. Ultimately, the best choice depends on your investment horizon and goals. Consulting a SEBI-registered financial advisor can be invaluable to ensure optimal alignment with your specific investment objectives.

Remember, a well-diversified portfolio across market caps/sectors and asset classes may help manage overall risk while potentially benefiting from its growth potential.

Disclaimer: PersonalFN does not receive any monetary compensation from the fund house or scheme names stated in the article.

This article first appeared on PersonalFN here