PSU Funds: Tapping into India’s Growth Story

Thematic PSU funds offer investors a unique gateway to capitalise on India’s evolving public sector landscape. Focused on companies where the government holds a stake, these funds span critical sectors like banking, infrastructure, energy, and defence. While their long-term performance has been robust, the journey is marked by cycles of volatility, influenced by market sentiment, government reforms, and sector-specific developments. This article delves into the dynamics, recent trends, risks, and key considerations surrounding PSU-themed investing 

At its core, thematic investing is exactly what it sounds like — investing based on a particular theme. Instead of diversifying across unrelated sectors, thematic investing narrows the focus to a single powerful idea. Think of it like a theme party you might have hosted or attended — whether it revolved around Bollywood, vintage fashion, vampires, pirates, or superheroes. The magic of such a party lies in everyone embracing the theme wholeheartedly, dressing and accessorising in ways that bring the concept to life. In the same way, thematic funds concentrate investments around distinct ideas like energy, technology, multinational corporations (MNCs), financial services, public sector undertakings (PSUs), and more. Thematic funds give investors the chance to ride transformative trends they believe will shape the future economy. But wait — you might be wondering: aren't thematic and sectoral funds the same? Not quite. While both concentrate on specific areas, sectoral funds are restricted to one particular industry, like banking or pharma. Thematic funds, on the other hand, can span across multiple industries, united by a single overarching trend or idea.

Understanding Thematic PSU Funds
In the following article, we will delve into PSU thematic funds, which have experienced a dynamic performance trajectory in recent times. While short-term returns have been impacted by market volatility, the long-term outlook remains promising. For instance, over the past five years, thematic PSU funds have delivered an impressive average annual return of 33.25 per cent, underscoring their potential for sustained growth. However, recent months have seen a downturn, with some funds experiencing negative returns due to sector-specific challenges and broader market fluctuations.

Over the past six months, PSU-themed mutual funds have faced challenges, with an average negative return of approximately 3.64 per cent. This downturn is attributed to sector-specific factors and broader market volatility.

Long-Term Perspective
Despite recent short-term declines, some PSU funds have demonstrated robust long-term performance. For instance, the SBI PSU Fund has achieved a 3-year return of 32.18 per cent, indicating potential for long-term growth.

Thematic PSU funds are equity mutual funds that focus on investing in PSUs. PSUs are companies owned (fully or partly) and operated by the government. These thematic funds typically invest a significant portion (around 80 per cent) of their assets in stocks tied to the chosen theme. This approach allows investors to capitalise on broad economic or policy trends (such as infrastructure development, financial inclusion, or defence modernisation) by investing in a basket of PSU stocks across multiple industries that fit the theme.

It’s important to distinguish thematic funds from pure sectoral funds. While both invest in a focused set of companies, sectoral funds concentrate on one industry (for example, only banking or only energy), whereas thematic funds can span multiple industries as long as they relate to the overarching theme. For instance, a thematic PSU fund might include governmentowned banks, railways, defence manufacturers, and power companies if the theme is national infrastructure growth. This multi-sector exposure under a single theme differentiates thematic funds from single-sector funds.

As of early 2025, the Indian government (in the name of the President of India) holds stakes in approximately 78 listed PSUs. The aggregate market value of these holdings is enormous – roughly ₹39 lakh crore by recent estimates. This “President of India” PSU stock portfolio spans diverse sectors including banking & finance, infrastructure, defence, shipping, railways, mining, oil & gas, metals, insurance, fertilisers, and more. A thematic PSU equity fund taps into this broad portfolio, aiming to ride the growth of India’s public sector enterprises.

Thematic PSU Funds’ Performance
In this section, we review how PSU-focused thematic funds have performed across various time frames and compare their average returns with the benchmark PSU index. The benchmark commonly used is the S&P BSE PSU Total Return Index (TRI), which tracks a basket of major PSU stocks. The table below summarises average returns for the Thematic PSU Funds category (i.e. PSU-focused equity funds) versus the benchmark, updated to April 28, 2025:Looking at the table, PSU thematic funds on average have delivered robust gains over the longer term, especially boosted by the rally in PSU stocks since 2021. For example, over the last 3 years, these funds have appreciated about 30.53 per cent on an annualised basis, closely tracking the PSU index. The 5-year total return is above 300 per cent in absolute terms, reflecting the sharp recovery of PSU stocks from their 2020 lows. Even on a 10-year basis, the category has turned in about 300 per cent total return, translating to roughly 14 per cent CAGR, slightly outpacing the benchmark.

In shorter periods, the returns have been more subdued. Over the past year, PSU funds saw a negative return of around 2 per cent gain, while the S&P BSE PSU index returned around negative 3.59 per cent. This relatively flat one-year performance (versus the triple-digit 1-year returns seen a year ago) reflects a recent correction in PSU stocks after their huge rally. Notably, about a year ago (2022–2023), PSU funds had skyrocketed – for the 1-year period then, the category average was over 90 per cent and the PSU index had doubled (~102 per cent return). In comparison, the past year has seen a significant cooldown. In fact, PSU funds fell sharply in late 2024, erasing a portion of earlier gains. We discuss the reasons for this reversal in a later section.

Overall, the data shows that over multi-year horizons, PSU thematic funds have closely matched their benchmark. During the big upcycle (2021–2023), they performed nearly as well as the index, though in 2022–23 the PSU TRI slightly outpaced the funds. Over a full market cycle, these funds have proven capable of delivering returns comparable to the PSU index – but with periodic bouts of volatility.

Inflows and AUM Trends in FY25
One of the remarkable developments in the past year has been the surge in investor money flowing into thematic and sectoral funds (including PSU-themed funds), and the subsequent slowdown by the end of FY2025. According to the Association of Mutual Funds in India (AMFI) data, sectoral/thematic equity funds saw record-breaking inflows in FY2024-25. In fact, from April 2024 to February 2025, net inflows into these funds totalled about ₹1.46 lakh crore, a jump of over 200 per cent compared to ₹46,138 crore in FY24. This means investors poured an extraordinary amount of money into sector- and theme-focused funds during 2024, with PSU-oriented funds being a major beneficiary. Industry experts attributed this trend to government-led initiatives and bullishness on themes like PSUs, manufacturing, defence, etc., which captured investors’ imagination.

Monthly data highlights how inflows peaked and then reversed. For instance, in February 2024, combined inflows into sectoral and thematic equity schemes hit a high of about ₹11,263 crore in a single month. This was one of the largest monthly influxes on record, outpacing even popular categories like Large-Cap or Mid-Cap funds at that time. By March 2024, inflows were still a hefty ₹7,918 crore (as per AMFI, which reports sectoral and thematic together). These massive inflows led to a rapid rise in assets under management (AUM) for PSU thematic funds. For example, the Aditya Birla Sun Life PSU Equity Fund’s average AUM jumped 162 per cent quarter-on-quarter in Q4 FY24 (Jan–Mar 2024), indicating how quickly investor money chased the PSU theme.

However, as the PSU rally lost steam in late 2024, investor sentiment shifted. By the end of FY25, inflows had slowed dramatically. AMFI reported a 97 per cent drop in net inflows in March 2025 for sectoral/thematic funds – inflows plunged to merely ₹170 crore in March, down from ₹5,712 crore in February 2025. Essentially, after nearly a year of euphoria, new money into these funds dried up when markets turned volatile. For the full FY25 (April 2024–March 2025), sectoral/thematic funds still netted a huge sum (over ₹1.47 lakh crore for the year, by one estimate), but the momentum came to a sudden halt at fiscal year-end.

This whiplash in flows reflects the nature of thematic funds – investors tend to pile in after seeing strong past performance, and retreat quickly at the first sign of trouble. It’s a reminder that flows often chase performance. By early 2025, with PSU fund returns turning negative in short-term periods, the frenzy cooled. Nonetheless, the cumulative AUM of PSU thematic funds remains much higher than a year ago, given the earlier inflows. Fund managers have had to deploy these inflows amid a more challenging market environment in 2025.

Factors to Consider Before Investing in PSU Thematic Funds
Investing in thematic PSU funds requires careful thought and alignment with one’s financial goals and risk profile. Here are key factors and updated considerations for potential investors:

Understanding of the Theme:
Ensure you have a clear grasp of the PSU theme and why you believe in it. These funds concentrate on public sector companies across various industries (banking, infrastructure, defence,etc.). Make sure you understand the investment thesis – for example, is it the expectation of continued government capex, reforms like privatisation, or the value unlocking in these enterprises? Only invest if you are confident that the theme (in this case, the resurgence of India’s PSUs) aligns with your outlook and objectives, because the fund’s fortune is tied to that narrative.

Investment Horizon:
Thematic investing works best long-term. Given the high volatility in PSU stocks, a long horizon (at least 5–7 years) is often recommended. This allows you to ride out cyclical downturns and benefit from the full play-out of the theme. For instance, PSU funds went nowhere for many years and then skyrocketed – only a patient long-term investor would have benefited. If you have a shortterm view, a thematic fund’s roller-coaster swings could lead to disappointment. Be prepared to hold through market cycles to potentially reap the rewards.

Prudent Capital Allocation:
Limit your exposure to high-risk thematic funds. It’s wise to allocate no more than ~10 per cent of your portfolio to PSU thematic funds (or any single theme). This ensures you don’t overconcentrate your portfolio in one narrow bet. PSUs, despite recent improvements, still face unique risks; a diversified portfolio will cushion you if the theme underperforms. Essentially, treat this as a satellite allocation in your equity portfolio, not the core.

Risk Profile and Volatility:
Assess your risk tolerance honestly. PSU funds can be very volatile – they may outperform dramatically in some years and plunge in others. For example, after delivering over +50 per cent in 2023, PSU funds saw significant drawdowns in late 2024 (nearly -20 per cent in a few months). You must be willing to tolerate sharp ups and downs. Key risks include sector concentration risk (e.g., if PSU banks struggle, the fund will too), policy risk (government decisions affecting PSU profitability), and liquidity risk (some smaller PSU stocks can be illiquid). If such volatility or drawdowns keep you up at night, then this category may not be suitable.

Valuation and Timing:
Be mindful of when you are investing. Jumping into a thematic fund after it has had a huge run-up can lead to sub-par results, as recent entrants in PSU funds discovered. Ideally, one should invest in such funds when the theme is out of favour (and valuations are cheap), not after it becomes the flavour of the season. While timing the market is hard, you can watch metrics like PSU index price-to-book or price-to-earnings relative to history. Currently (2025), PSU valuations, although off their peak, are not as cheap as they were a few years ago. Future returns might be more muted. If you are making a fresh investment now, temper return expectations and be ready for potential shortterm declines if the current consolidation continues.

Government Intervention Impact: Since these funds invest in government-controlled companies, keep an eye on policy changes and government actions. Reforms like bank recapitalisation, infrastructure spending, privatisation announcements can significantly boost PSU stocks. On the other hand, government mandates like sudden subsidy burdens, price controls, or a strategic divestment can hurt sentiment. For example, a policy promoting renewable energy might boost PSU renewable energy firms, whereas a cap on fertiliser prices could squeeze PSU fertiliser companies’ margins. Staying informed about the policy environment is crucial when invested in PSU funds, as government decisions can have an outsized effect on these companies’ fortunes.

In summary, invest in a PSU thematic fund only if you fully appreciate the theme’s potential and risks, and if it fits your financial plan. These funds are high-risk, high-reward plays – they can deliver market-beating returns, but also require conviction and the ability to weather volatility

Conclusion
Thematic PSU funds offer a focused avenue to participate in the growth and transformation of India’s public sector enterprises. By investing predominantly in PSU companies spanning banking, infrastructure, energy, defence, and other key industries, these funds allow investors to bet on a broad national theme – the revival and strengthening of the public sector. The past few years have demonstrated this theme’s promise, with PSU funds delivering stellar returns amid operational turnarounds and policy tailwinds. However, with high reward comes high risk. The performance of PSU funds has been cyclical and at times extreme – enormous gains during rallies and steep losses during downturns. This reinforces that such funds are suitable for informed, long-term investors who understand the theme’s nuances. One must carefully consider factors like entry valuations, the government’s role (both as owner and policymaker), and one’s own risk appetite before investing.

On the positive side, India’s PSU landscape today is more efficient and profit-focused than it was a decade ago. Many public sector companies are posting record profits, and the government’s reform initiatives (like asset monetisation, improved corporate governance, etc.) are yielding results. If these trends continue, PSU thematic funds could reward patient investors with solid returns and dividends over time – as evidenced by historical data. Additionally, PSU funds provide exposure to sectors that are critical to India’s economy (banks, power, rail, defence) which can be a valuable diversification for those heavily invested in private sector-dominated indices.

That said, prudent investing principles apply. It’s crucial not to get swayed by past performance alone or to allocate too heavily to any one theme. Those who invested in PSU funds at the peak of optimism have learned that fortunes can reverse quickly. Going forward, investors should keep realistic expectations (PSU funds may not repeat their recent super-normal returns consistently) and be prepared for intermittent volatility. In conclusion, a thematic PSU fund can be a worthwhile addition to a portfolio for capturing the unique opportunities in India’s public sector – but it demands a long-term mindset, careful monitoring, and courage of conviction. Do your homework, perhaps consult a financial advisor, and ensure it aligns with your goals. When approached with due diligence and patience, thematic PSU funds enable investors to partake in the value creation of India’s government-owned enterprises, while diversifying some of the risks through professional fund management. It’s a journey that can be rewarding, but as with any thematic play, one must navigate it with eyes open and risk controls in place.