PSU Bonds

PSU Bonds (Public Sector Undertaking Bonds) are debt instruments issued by government-owned companies where the state holds a majority (usually over 51%). These bonds are used to raise capital for infrastructure, development projects, and working capital. While not as safe as government securities, PSU bonds typically enjoy high credit ratings and benefit from implicit government backing, making them a dependable option in the corporate bond space.

Key Features:

• Issued by majority government-owned enterprises (PSUs)

• Typically rated high (AAA or AA+), indicating strong credit quality

• Tenure usually ranges between 5 to 10 years

• Can be traded in the secondary market via Demat account for liquidity

• Offers fixed or floating interest rates often above bank FDs, typically around 7-11% depending on credit rating

When you invest in a PSU bond, you're essentially lending money to the government-backed issuer. In return, you receive regular interest payouts (annually or semi-annually) and the principal back at maturity. PSU bonds' perceived safety comes from government ownership and strong financial profiles of issuing entities.

• Higher Safety Compared to Private Bonds: Government backing reduces default risk.

• Stable, Fixed Income: Regular coupon payments offer dependable returns: Ideal for steady cash flow.

• Better Returns than FDs: PSU bonds generally offer higher yields than fixed deposits.

• Diversification & Portfolio Stability: Great addition to conservative portfolios to reduce volatility.

• Liquidity Options: Many PSU bonds are listed: Allowing for pre-maturity exit if needed.

• Not Equivalent to Sovereign Bonds: Final safety layer isn't always explicit—PSUs can still default.

• Interest Rate Risk: Bond prices can fall if market interest rates rise.

• Inflation Risk: High inflation may erode real returns over time.

• Liquidity May Vary: Some PSU bonds see low trading activity, especially in smaller denominations.

• Taxable Returns: Interest income is taxed as per your slab; long-term or short-term capital gains apply if sold before maturity based on period of holding.

Best for:

• Risk-averse investors seeking steady income from government-backed sources.

• Long-term goal planners looking for predictable yields and principal security.

Not ideal for:

• Investors needing highly liquid, short-term instruments.

• Those seeking aggressive growth or equity-like returns.