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What are PSU Bank ETFs? How do you invest in them?

Buying PSU ETFs is a great way to invest in government-owned banks that cater to a very large customer base

In this article, we are going to talk about what PSUs are, what their ETFs mean, and whether it is a good idea for you to invest in these securities. Every investment is different, and we’re going to explore which types of investors should invest in PSU ETFs for the highest return to risk.

What are PSU Banks?

Public Sector Undertaking banks are commercial banks in India where the government (central or state) holds a majority stake (typically more than 51%). These banks play a vital role in:

  • Making financial management and commercial banking inclusive: PSU banks usually have a very wide branch network, especially in smaller cities and towns where traditional private banks don’t care to operate. For the people that live in these places, PSU banks are the only way to stay connected to the banking system.
  • Infrastructure development: These PSU banks also contribute significantly to infrastructure financing in the country in sectors like power, transportation, and communication. They have, hence, become support pillars for the economy.

What qualifies a bank as a PSU?

The primary and most important reason for a bank to be classified as a PSU is ownership. If more than 51% of the bank is owned by the state or central government, it is considered to be a public sector undertaking.

PSU BankPrivate Bank
These are banks where a majority stake is owned by state or central governments.Private sector banks are owned by private parties.
PSU banks are involved in various schemes in the public interest and contribute to welfare policiesWork to generate revenues and maximum returns for their shareholders, just like any other company
Cheaper than private banks owing to government subsidies and lower operating costsCharges on loans are typically much higher than public sector banks
Many public sector banks have no limits on daily international transfersPublic banks may sometimes limit international transfers to $5,000 per day
In these banks, directors may be appointed by the government without permission or approval from board membersThese banks are independent of government influence and work according to the directions of the board

Classification of PSU Banks in India

There are two broad categories of PSU banks:

  • Nationalised banks: These are banks that were previously private entities but were brought under government ownership by nationalisation events in the past. Some examples include the State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda (BOB), and Canara Bank.
  • New Generation PSU Banks: These are banks that were established as PSUs by the government after the nationalisation era. Examples include IDBI Bank and the Bank of Maharashtra.

What are PSU Bank ETFs?

PSU Bank ETFs offer a basket of PSU bank stocks listed on stock exchanges like the NSE and the BSE. These ETFs track the Nifty PSU Bank Index. By investing in a product like this, you expose yourself to the performance of multiple PSU Bank stocks without having to own every one of them.

That is, in fact, one of the primary advantages of investing in ETFs – you get to broaden your exposure to a certain category of stocks simultaneously without having to go out and buy every single one of them.

ETFs are also more cost-effective compared to buying these individual stocks, and come with lower expense ratios than most actively managed mutual funds.

Since ETFs are popular and very easily accessible, they’re also very liquid – meaning you can buy and sell them whenever you want.

Nippon India ETF Nifty PSU Bank BeES is by far the biggest bank ETF operating in India that you could buy on the exchange. 

Frequently Asked Questions

Is the Nippon India ETF my only option for getting exposed to the PSU Bank index?

While it’s currently the most dominant player, there is a possibility of another contender. Kotak Mahindra Mutual Fund offers a Nifty PSU Bank ETF that tracks the same underlying index (Nifty PSU Bank Index). While their core holdings are largely similar, they will differ a little bit in expense ratios or brokerage fees.

How do dividends from these ETFs work?

Many PSU banks pay dividends to their shareholders. When you invest in a PSU Bank ETF, you’ll receive a portion of the dividends these banks distribute, based on their weightage within the ETF. The ETF itself doesn’t actively manage these dividends, but rather reflects the combined dividend payouts of the underlying PSU bank holdings.

Are PSU banks good candidates for short-term trading?

PSU Bank ETFs are generally considered more suitable for medium to long-term investment horizons. While they can be traded intraday like stocks, the price fluctuations can be significant.

How expensive is buying individual stocks rather than an ETF for PSU banks?

When you buy individual stocks, you incur brokerage fees for each transaction. An ETF purchase incurs a single fee. Since the Nippon India ETF consists of 12 stocks, you can imagine how much more you’d have to pay if you decided to buy these scrips individually.

How risky are PSU Bank ETFs compared to investing in a single PSU bank stock?

PSU Bank ETFs offer diversification across multiple PSU banks, inherently lowering risk compared to putting all your eggs in one basket (i.e., buying a single PSU bank stock). However, this does not mean that they’re risk-free assets – these stocks are still exposed to market risk and you should do your own research before deploying your money.

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