PSU Bonds are the Public Sector Undertaking Bonds issued by the Public Sector Undertakings. The Indian Government has at least 51% or more stake in these public Sector Undertakings (PSUs)
These are the debt instruments the government sector companies generally issue for the medium to long term. The issuer(government) offers a fixed return to the holder (citizens) and repays the principal amount on its maturity.
It is the most popular investment option for investors looking forward to safe investments and a high yield.
Following is the list of some of the PSU bonds issued in India-
Power Finance Corporation (PFC)
Nuclear Power Corporation (NPC)
Rural Electrification Corporation (REC)
Indian Railways Finance Corporation (IRFC)
National Highways Authority of India (NHAI)
Food Corporation of India (FCI)
Power Grid Corporation of India (PGC)
Indian Oil Corporation (IOC)
National Thermal Power Corporation (NTPC)
India Infrastructure Finance Company (IIFC)
Housing and Urban Development Corporation (HUDCO)
Mahanagar Telephone Nigam Limited (MTNL)
Oil and Natural Gas Corporation (ONGC)
Bharat Petroleum Corporation Limited (BPCL)
Gas Authority of India (GAIL)
Steel Authority of India (SAIL)
Punjab National Bank (PNB)
Bank of Baroda (BOB)
State Bank of India (SBI)
Export-Import Bank of India (EXIM)
National Housing Bank (NHB)
Who issues these bonds?
Public Sector Undertaking (PSU) Bonds are issued by Government entities or such public companies, whereby the government has the majority ownership in the company.
How do these bonds work?
These are the debt instruments the government sector companies issued for the medium and long term. The shareholding capacity of the government must be 51% or more in such companies.
There is a kind of loan agreement between the government and the citizens while issuing such bonds.
The government here acts as the issuer, and the citizens act as the lender.
The government agrees to pay a fixed return regularly to the citizen and also promises to repay the principal amount on the bond’s maturity.
Features of PSU bonds
These bonds are of medium to long-term nature. They generally come with a period ranging from 10-15 years.
The bonds are tradeable at the exchange and can be held easily in a demat account.
These bonds are highly liquid.
The government issues PSU bonds, and hence they have high credit ratings and are a very safe option for investment.
They offer a regular fixed income to the holder.
Advantages of PSU bonds
High yield- PSU bonds offer higher interest rates as compared to FDs.
Guarantee- These bonds offer greater security to the holder as government entities issue them, making it attractive and trustworthy for investors.
Less risky- These are less risky investments than other available investment options.
Low risk of default- Since PSU bonds are issued by government entities. Hence, these bonds have a low risk of default in the interest payment and repayment of the principal amount.
Regular income- PSU bonds are fixed-income investment options. They provide a regular income to the holder.
Less vulnerable- PSU bonds are less vulnerable to market fluctuations.
Disadvantages of PSU bonds
Taxable - Interest on PSU bonds is taxable in the hands of the holder as per their tax slab.
Fixed Return - These bonds do not consider the market's inflation rates. They offer a fixed, predetermined interest rate; hence, the holder is denied the inflation benefits.
Financial Stability - Issuer's ability to pay back has an impact on bondholders also, in case of uncertain events, bondholders may have to face the risk.
Who should invest in PSU bonds
High-income taxpayers- PSU Bonds are suitable for high-income taxpayers. PSU bonds are preferred because of taxation reasons. Investors holding PSU bonds for 3 years or more must pay long-term capital gain taxes of @20% with indexation benefits. Otherwise, investors holding PSU bonds for less than 3 years will be liable to pay short-term capital gains tax.
Risk-averse investors- Risk-averse investors with low risk-taking capacity will be suitable for investing in PSU bonds as the government backs these bonds.
Portfolio diversification- Investors preferring to diversify their investment portfolio have a good option to invest in PSU Bonds.
Long period- PSU bonds investment will be suitable for those investors looking to invest their hard-earned money for a longer time, as these bonds come with a maturity period of 10-15 years.
Safety- Investors looking for a safe investment option will find investing in PSU bonds a good option. These bonds are issued by government entities so it gives a guarantee to the investors, and also, there is a lesser risk of default.
How to calculate the yield of PSU Bonds?
The formula to calculate the bond yield is to divide the coupon's annual payment by the bond's Face value. Bond Yield = Annual Payment of the coupon/ Current market price X 100 Let's understand this by an example:
The current Market Price is ₹950/-
The face value of the bond is ₹1000/-
The coupon rate is 8%.
Step 1: Calculate the Annual Coupon rate ₹ 1000 X 8 %= ₹80 Step 2: Divide the annual coupon rate by the current market price Bond Yield= 80/950 X 100 Bond Yield = 8.421
FAQs about PSU Bonds
Are PSU bonds safe?
Yes, PSU bonds come under one of the safe investment options as the government has administrative control over these bonds. Since the government backs it, it is considered a safe investment option.
Can PSU bond default?
Generally, PSU bonds do not default. But, an investor should always consider a good rating of PSU bonds and look into other factors before making an investment decision.
Can an investor opt for premature redemption of PSU bonds?
Yes, an investor can opt for premature redemption of PSU bonds at their convenience.
What is the minimum amount of investment in a PSU Bond?
The investor can invest a minimum of ₹ 1000/- in multiples of ₹ 1000/-.
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