PSU Funds: High Returns, But Caution Advised for Long-Term

While PSU index funds have recently shown strong returns, their historical performance suggests a cautious approach for your long-term portfolio.

• Passive Public Sector Undertaking (PSU) index funds delivered annualised returns up to 26.5% over the past five years, significantly outperforming the Nifty 500’s 11.2% (Value Research, July 8, 2026).
• This recent surge is attributed to factors like depressed starting valuations, increased government capital expenditure, and improved balance sheets.
• Despite the strong short-term showing, these funds are best suited as smaller, satellite holdings within a diversified core portfolio due to their cyclical nature.

Public Sector Undertaking (PSU) index funds in India have been quite the talk of the town, recently delivering impressive annualised returns of up to 26.5 percent over the trailing five-year period, as of July 8, 2026. This performance far outshines the Nifty 500, which managed an 11.2 percent return during the same timeframe, according to an analysis from Value Research.

This remarkable post-2020 surge is attributed to several factors: starting from depressed valuations, benefiting from increased government capital expenditure, and showing improvements in their balance sheets. While options like the Nifty CPSE, Nifty PSE, and BSE PSU indices track purely government-owned entities, even the Bharat 22 index, which has some private sector holdings, has participated in this broad rally.

However, before you consider adjusting your Systematic Investment Plans (SIPs) or portfolio based solely on these recent numbers, it’s crucial to look at the bigger picture. A longer-term analysis of five-year rolling returns from 2011 to 2026 reveals that PSU indices have, on average, delivered lower returns than the broader market and experienced negative five-year periods far more frequently. This means while your large-cap fund might have consistently delivered 10-20 percent returns, PSU funds often fell outside this range.

This historical volatility stems from their inherent cyclical characteristics, such as government ownership, policy-driven decisions, and heavy exposure to specific capital expenditure cycles. Therefore, while the recent boom is exciting, Value Research suggests that PSU index funds are best considered as satellite holdings within a well-diversified core portfolio, rather than forming its central component. They can add a specific flavour, but shouldn’t dominate your long-term financial strategy.

ONE THING TO CONSIDER TODAY

Now might be a good time to review your portfolio’s diversification. Ensure no single sector or type of fund, like PSU funds, takes up an outsized portion of your overall investment, especially if your SIPs are geared towards long-term goals.