High-flying PSU mutual funds lose 3% in one month. What should investors do?

PSU themed mutual funds, which have been top performers in the last one year with around 97% returns, have lost around 3% in the last one month, data crunching by ETMutualFunds showed. Around six funds in the category marked their presence in the said period.

Aditya Birla Sun Life PSU Equity Fund lost the most at 4.01% in the last one month. SBI PSU Fund lost 3.35% in the same time period.



ICICI Prudential PSU Equity Fund lost 3.28% return in a similar time period. Quant PSU Fund offered a negative return of around 2.75% in the last one month. Invesco India PSU Equity Fund, the oldest PSU fund, gave a negative return of 2.32%. CPSE ETF, the largest PSU fund based on assets managed, lost 2.27% in the same time period.

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Now the important question is what factors have impacted the performance of these funds after one month of election results and before the budget?

“The PSU Index experienced a 3-4% decline over the past month, largely due to profit booking driven by speculation about the current government getting re-elected. However, a reversal in the trend has been observed over the last two weeks, with the index gaining 2%. Thematic and sectoral categories tend to undergo cyclical performances and are not recommended for unseasoned investors,” comments Shweta Rajani, Head- Mutual Funds at Anand Rathi Wealth Limited.

An analyst comments that a 3-4% decline in the performance of the fund might seem modest but this warrants a closer look at the understanding of what is happening and why.

“While a 3-4% decline in fund performance might seem modest, it's notable given that the Nifty 50 has achieved double-digit gains in the same period. This warrants a closer look at understanding what is happening and why. Given that one month is too brief for significant changes in the underlying businesses and no major sector developments have occurred, the primary factor appears to be profit booking,” said Vaibhav Jain, Head of Content & Education, Share.Market

He added, “Investors, likely looking to secure gains after the funds and their underlying stocks delivered approximately 80-90% returns over the past year, are locking in profits. This strategy, while prudent from an investment standpoint, has led to the observed underperformance relative to the broader market.”

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In the last one year, CPSE ETF offered the highest return of around 118.81% return. The oldest PSU fund, Invesco India PSU Equity Fund, gave 97.63% return in the said period.

SBI PSU Fund offered 96.28% return, followed by Aditya Birla Sun Life PSU Equity Fund by 90.83% return in the similar time frame.

ICICI Pru PSU Equity Fund offered 83.13% return in the same time horizon.

After seeing the past performance of these funds, investors are concerned about what strategy they should follow? What is the way forward?

“Investors should keep their strategy simple. With the ruling party securing a third term, the market is well aware of their focus on initiatives that benefit PSUs. If you have confidence in your PSU holdings based on this theme, it’s smart to hold onto them despite the recent underperformance. This approach aligns with the expectation that PSUs will continue to benefit from government policies,” recommends Jain.

He further mentions, “In the short term, the recent profit booking, while causing some market turbulence, is likely to affect only short term traders. Maintaining your position through this phase can be prudent, especially if you believe in the long-term growth prospects of these investments.”

Shweta Rajani commented, “Ideally investors should build a long-term strategy and diversify their portfolios across different categories, market caps, and sectors through diversified mutual funds. Ensure your portfolio is diversified across 8-10 fund houses and 10-15 schemes to benefit from various investment styles and reduce risks associated with AMCs and fund managers. Limit the allocation to a single fund manager to 12-15% and to a single fund house to no more than 20%. This balanced approach, focusing on both optical and technical diversification, helps manage market risks effectively.”

PSU funds are thematic funds that invest in stocks of public sector undertakings or PSUs. These companies are government-owned. So they are influenced by government policies on sectors they are operating.

You should invest in these schemes only if you have a long investment horizon or have intimate knowledge about the sector to time the entry and exit in these schemes. Remember, every sector or theme can go out of fashion depending on the economic conditions. You should not make hasty decisions in those phases.