Despite volatility in global markets and geopolitical tensions such as the Middle East conflict, some sectors of the Indian stock market continue to show resilience. One surprising bright spot has been PSU mutual funds, which have delivered strong returns compared with many other equity categories.
Is there any hope remaining in the market given that stocks are steadily declining owing to a variety of issues, including the Middle East conflict?
PSU Mutual Funds Stand Out in a Weak Market
Funds that invest in shares of PSUs (Public Sector Units) have been an exception, despite the fact that the majority of equity mutual fund (MF) categories have seen short-term losses and have not produced significant returns over the course of three and five years.
MFs are one of the only three types of equity funds that have produced positive returns thus far in 2026. MFs invest solely in PSU shares. As an aside, the category outperforms other equities funds over the three and five-year horizons, providing investors with annualized returns of 30.5% and 27.3% (as of March 11).
Performance Range of PSU Mutual Funds
The worst performer among equities PSU MFs fell by almost 5.6% over the past year, while the top performer increased by almost 29%.
However, there are only a few funds available in the category—seven, to be exact. Additionally, PSU banks and enterprises involved in the energy and utility industries have a significant advantage in these funds’ portfolios.
📈 Top PSU Stocks Driving Mutual Fund Returns
- State Bank of India (SBI): 49.3% growth in the past year
- Bank of Baroda: 42.8% annual growth
- Bharat Petroleum Corporation (BPCL): 22.9% growth
- NTPC: 17.4% increase in stock value
- NIFTY-50 Growth: 5.7% during the same period
- Key Drivers: Banking, energy, and utility sector PSUs
Top PSU Companies Leading the Rally
Among the best choices for equities MFs investing in PSUs are State Bank of India (SBI), Bharat Petroleum Corporation (BPCL), Bank of Baroda, and NTPC. These PSUs’ scrips have been among the top performers on the markets.
In contrast to the NIFTY-50 index’s 5.7% growth during the past year, the SBI scrip has increased by 49.3% in absolute terms, while Bank of Baroda has increased by 42.8%, BPCL by 22.9%, and NTPC by 17.4%.
Reasons Behind PSU Funds’ Strong Performance
“A mix of earnings recovery, valuation re-rating, and policy assistance has largely led the outstanding performance of equities mutual funds investing in PSU stocks,” stated Rajani Tandale, senior vice president, mutual fund, 1 Finance, a personal finance advisory service. According to Swati Jain, CEO of Wealth at Arihant Capital Markets, “PSU funds achieved significant returns led by valuation re-rating from historically low levels, with stocks shifting from cheap to fair prices.”
The government’s increased emphasis on PSUs has benefited businesses because many of them are present in infrastructure-related industries. Infrastructure spending has grown from 1.13% of GDP (gross domestic product) in 2019–20 to a projected 3.2% in 2026–2027. PSUs would benefit if the government kept spending heavily on infrastructure. According to experts, PSUs’ fortunes improved in line with government expenditure on the industry to boost the economy as a whole.
🏗 Government Spending Supporting PSU Growth
- Infrastructure Spending: Increased from 1.13% of GDP in 2019–20
- Projected Spending: 3.2% of GDP by 2026–2027
- Budget Allocation: ₹12.2 lakh crore capital expenditure
- Policy Initiative: Infrastructure Risk Guarantee Fund proposal
- Sectors Benefiting: Power, defense, banking and energy
- Impact: Better project viability and increased institutional investment
Government Infrastructure Push Helping PSUs
“The government’s persistent infrastructure and capital expenditure drive has boosted sectors like defense, power, and energy where many PSUs operate, while PSU banks have dramatically strengthened their balance sheets over the past few years with a sharp decrease in NPAs,” Tandale stated. “The increase represented both improving fundamentals and a market re-rating of the sector, as these funds also benefited from starting at somewhat depressed prices,” she stated.
According to industry experts, the union government’s ongoing commitment to infrastructure-led economic growth, which includes the proposed “Infrastructure Risk Guarantee Fund” and an increase in capital expenditure to a record ₹12.2 lakh crore in the budget for 2026–2027, significantly improves project viability, strengthens risk-sharing, and will further mobilize long-duration institutional capital.
Future Outlook for PSU Mutual Funds
Is the category able to maintain its momentum? These funds, according to advisors, would not be able to match the current performance. It might not be feasible to anticipate returns at the same rate in the future. From this point on, performance will be more dependent on the execution and delivery of results than on the growth in valuation, according to Tandale.
Higher input costs (caused by the Iran-Israel war) will put pressure on power generation firms like NTPC and GAIL, transportation companies like SCI, and fertilizer industries like NFL and RCF. In the medium run, this may have an impact on PSU performance overall, according to Jain. PSUs will benefit in the long run from the structural capital expenditure cycle, governance changes, and robust order books. The actual implementation of government capital expenditure plans and earnings growth would have a much greater impact on the future returns from these funds, she stated.
Investment Strategy and Risk Considerations
How much should investors put into equities MFs and other thematic funds that invest in PSUs? According to Tandale, “investors should also recognize that sectoral or thematic calls, particularly PSU-focused strategies, are inherently high-risk bets since they require concentrated exposure to a restricted segment of the market and are often connected to policy cycles.”
“Only if you have a high-risk appetite, a lot of patience to tolerate negative and below-industry average returns for a few years, and the know-how to get in and out of these funds” should you choose PSU or any thematic fund, according to Jain.
According to Tandale, “for the majority of individual investors, the core of the portfolio should stay in diversified categories like flexi-cap funds, which give greater market exposure and better risk diversification over lengthy investment horizons.” According to Jain, “invest in well-diversified flexi cap funds so the fund management can do the job for you.”
Frequently Asked Questions
1. PSU mutual funds: what are they?
These mutual funds primarily purchase stocks of government-owned businesses (Public Sector Units).
2. Why have PSU funds been doing so well lately?
PSU banks’ performance has increased due to improved valuations, government infrastructure spending, and improved financial health.
3. Which PSU businesses made the biggest contributions to returns?
State Bank of India, Bharat Petroleum Corporation Limited, Bank of Baroda, and NTPC Limited are some of the major contributors.
4. Do PSU mutual funds pose a risk?
Indeed. They concentrate investments in a small number of industries because they are sectoral/thematic funds.
5. How much money should investors put into PSU funds?
Experts advise retaining the majority of investments in diverse funds, such as flexi-cap funds, and limiting allocation.
Conclusion
Thanks to increased PSU performance and government spending, PSU mutual funds have become one of the few bright spots in the 2026 equity market. However, investors should approach these funds cautiously and have a diverse portfolio for long-term stability because they are concentrated and policy-driven.
Disclaimer: This article is for informational purposes only and should not be considered financial or investment advice. Investors should consult a financial advisor before making investment decisions.
