With the economy of India expected to keep growing consistently in 2025, many regular investors in India are applying a new approach to invest in sectoral mutual funds. Two sectors getting a lot of attention right now are PSU Funds and Banking Funds. These types of mutual fund investments are well known for strong economic growth and giving good returns during the period of rising interest rates.
However, the key question is Should You Invest in Banking or PSU Funds in 2025?
Let’s understand in simple terms and look at the top-performing mutual funds in both categories, its pros and cons, their key differences, and the current market condition.
Understanding Banking and PSU Mutual Funds
Banking Mutual Funds:
Banking Funds are a type of mutual fund that usually invests in companies which are related to the financial sector. This includes financial technology companies, insurance companies, public sector banks, private banks, and even BNFCs (No-Banking Financial Companies). In simple terms, if the company deals with financial services or money, then it might be part of a Banking Fund.
PSU Mutual Funds:
PSU Funds are also a type of mutual funds that mainly invest in public sector undertakings (PSUs). These companies are run and owned by the government itself. PSU Funds don’t just depend on one industry, instead they add a combination of sectors like banking, railways, defense, mining, steel, and energy.
Both PSU Funds and Banking Funds are dedicated to particular sectors. So, they usually give you good returns when their sectors are doing well in the market. But if these sectors witness a decrease in momentum, then these mutual funds might not perform well in the market as expected.
Why Banking Funds Look Attractive in 2025
Here is the key reasons why investing in banking sector in 2025 is being considered as a smart choice in 2025:
- Strong earning growth: Banks are making huge profits because they are earning better margins, bad loans (NPAs) have decreased, and also more people are taking loans.
- Digital adoption: Banks are using technologies like digital lending and fintech, which is really helping them reach maximum customers and also working faster.
- Healthy balance sheets: Most Indian banks, mainly government public sector banks and big private banks now have much better asset quality and also have improved their financial problems.
For more details on the Indian banking sector’s stability, you can refer to the Reserve Bank of India (rbi.org.in).
What’s Driving PSU Funds in 2025?
Public Sector Undertakings (PSUs) are gaining popularity again in 2025 because of a few strong reasons:
- Disinvestment plan: The Indian government is selling part of its ownership in some PSUs to raise money and improve efficiency. This move is helping these companies grow and attract investors.
- Attractive valuations: Many PSUs are priced lower than similar private companies, which means investors can buy them at a good price right now.
- Dividend yield: PSU stocks often give high dividends, so people who want regular income prefer PSU mutual funds.
- Capex boom: The government is spending a lot of money on building things like roads, railways, defense, and power projects. This is helping many PSUs grow and do better financially.
For PSU investment policy details, visit Department of Investment and Public Asset Management (dipam.gov.in).
Banking vs Mutual Funds: Keys Difference
| Feature | Banking Funds | PSU Funds |
| Sector Exposure | Banking & financial services | Government-owned companies |
| Risk Level | Moderate to High | Moderate to High |
| Return Potential | High during economic expansion | High during PSU sectoral revival |
| Suitable For | Growth-focused investors | Value & dividend-focused investors |
| Diversification | Limited to financials | Across various PSU sectors |
Should You Invest in Banking or PSU Funds?
If you’re focusing on growth and feel good about the future of the Indian banking sector, then banking mutual funds could be a good choice. With rising credit demand, more digital banking, and lower bad loans (NPAs), this sector is showing strong potential.
On the other hand, if you want value investing and want to invest in steady and government-backed companies, then PSU mutual funds can be a better option. These funds can benefit from long-term plans like divestment and infrastructure development.
Pro Tip: If you want a balanced approach, then you can divide your money between both funds. For example, 60% in mutual funds of the banking sector and 40% in PSU mutual funds, based on how much risk you’re willing to take.
Top 3 Banking Mutual Fund Picks – 2025
If you’re looking to invest in banking sector, then these are the best banking mutual funds for 2025 based on solid past performance and returns, trusted fund managers, and a positive forecast for the sector:
1. ICICI Prudential Banking and Financial Services Fund
- 3-Year CAGR: 22%
- AUM: ₹7,800 crore
- Why choose this fund?
It invests across top private banks and insurance companies, giving you a good mix of stability and growth potential.
2. Nippon India Banking Fund
- 3-Year CAGR: 20.5%
- AUM: ₹5,100 crore
- Why choose this fund?
It has solid investments in large PSU banks and mid-sized finance companies, offering a blend of safety and aggressive growth.
3. SBI Banking & Financial Service Fund
- 3-Year CAGR: 21.2%
- AUM: ₹6,400 crore
- Why choose this fund?
This fund balances between PSU and private and also invests in fintech companies for future-ready growth.
Top 3 PSU Mutual Fund Picks – 2025
Interested in government-backed companies? These are the best PSU mutual funds to consider right now:
1. HDFC PSU Fund
- 3-Year CAGR: 27.3%
- AUM: ₹3,900 crore
- Why choose this fund?
It focuses on strong PSU companies in defense, power, and oil, which are all critical sectors with long-term potential.
2. SBI PSU Fund
- 3-Year CAGR: 25.8%
- AUM: ₹3,200 crore
- Why choose this fund?
It invests in undervalued PSU banks and energy firms, which could offer good returns as these sectors recover.
3. ICICI Prudential PSU Equity Fund
- 3-Year CAGR: 24.5%
- AUM: ₹2,700 crore
- Why choose this fund?
This fund prefers dividend-yielding PSUs that have low debt, which makes it a safer option for steady growth with good returns.
Things to Keep in Mind Before Investing
- Sectoral risk: These funds make investments in particular sectors, so they are not as distributed as diversified equity funds. If that particular sector doesn’t do well, your investment may suffer.
- Time horizon: Stay invested for at least 3-5 years, because this gives your investment time to recover from any short-term ups and downs.
- Exit load & tax: Before you take out your money, don’t forget to check if there is an exit load and how much capital gains tax you need to pay.
- Monitor news: Follow important updates like changes in government policies and RBI interest rates, because they can impact your fund’s performance.
- Fund performance: Don’t just judge the fund based on their past returns. Check how the fund performed during market fluctuation.
Final Thoughts
If you believe in the long-term digital transformation of the banking sector, then banking funds could be a good choice.
But if you trust the growth of India’s PSU reform journey and like the idea of earning regular income from dividends, then PSU funds might give you better results.
The smartest move is to mix both in your portfolio, based on your financial goals, how much risk you’re willing to take, and how long you’re planning to stay invested.
FAQs
Are banking mutual funds good for long-term investment?
Yes, they can be a good option if you’re sure about the future growth of the banking and financial sector. Just make sure you stay invested for at least 5 years or more than that.
Which is less risky – banking funds or PSU funds?
Both banking funds and PSU funds come with their own risks. But PSU funds can be a bit more unpredictable because they depend more on government policies and management decisions.
Can I invest in both banking and PSU mutual funds together?
Yes, you can invest in both. This gives you a good mix, like banking mutual funds for growth potential and PSU mutual funds for value and dividends.
Do PSU mutual funds offer better dividends?
Yes, many PSU companies pay good dividends. That’s why PSU mutual funds can be a smart choice if you’re looking for regular incomes.
Are sectoral mutual funds suitable for SIPs?
Yes, you can invest in sectoral mutual funds through SIPs. but remember, these funds are riskier, so SIPs work better if you invest for the long-term and keep investing even when the market is down.