What are PSU Bank ETFs? Everything You Need to Know Them

Key Highlights

• ETFs (Exchange-Traded Funds) are financial instruments that track specific indexes, commodities, or industries. They can include various kinds of assets.

• PSU bank ETFs primarily consist of securities from the PSU Banks Index.

• They are traded on the stock exchanges, just like many other financial instruments.

• PSU bank ETFs are generally considered to be moderate or high-risk investments. This is because of the risk associated with PSU banks.

What are ETFs?

Before going straight to the PSU bank ETFs meaning, let's first learn what are ETFs. Exchange-traded funds (ETFs) are instruments that track a particular index, commodity, or industry. They include securities like bonds and stocks. An ETF can also have a combination of different types of assets. One can trade them on an exchange, just like stocks.

What is a PSU Bank ETF?

A PSU Bank ETF invests in the securities that make up the PSU Banks Index. They are traded on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). These ETFs are registered with the Securities and Exchange Board of India (SEBI).

Most of the PSU bank ETFs traded in India are open-ended funds. These ETFs can usually issue and redeem the units of ETF whenever they want. The amount of risk associated with PSU banks is usually quite high. So, the PSU bank ETFs are generally classified as moderately high and high-risk investments.

The "Creation Units" or "Creation Blocks" make ETFs a unique financial instrument. "Creation Blocks" often assist in narrowing the difference between the market price and the NAV of the ETF shares. The investors receive the difference as part of their returns on investment.

ETFs aggressively follow the market indices, particularly the PSU bank ETFs. Yet, compared to mutual funds, the frequency of portfolio rebalancing is lower. As a result, the expenditure ratio is favourable, and the overhead and administrative expenses are significantly lower. Furthermore, there are no entry or exit loads associated with ETFs. Hence, ETFs offer a more affordable and liquid investing option.

How do PSU Bank ETFs Work?

Let's now examine how an ETF works by comparing it with an index fund. An index fund tracks the performance of the Nifty or Sensex stock indices. An index fund consists of stocks and bonds. Likewise, the objective of exchange-traded funds (ETF) is to track the performance of an index, sector, or industry. PSU bank ETFs are linked to the PSU Bank Returns Index. It invests in companies that are included in the index. The investment ratio and the percentage of equities in the index are usually similar.

Factors to Consider For Investing of PSU Bank ETFs

An investor should be very careful while investing in PSU bank ETFs. The following are some of the crucial things to consider.

Demat Account: You must have a Demat account if you want to trade PSU bank ETFs. The investor has the option to trade on his own or through a broker. The additional transaction fees associated with investing through a broker might raise the overall cost of the investment.

Tax Repercussions: ETFs that pay dividends in India are liable to a Dividend Distribution Tax. Capital gains are classified as short-term or long-term, Depending on the holding period.

Risk: ETF investments are hugely affected by the volatility in a market. Therefore, you must continuously monitor two key factors to obtain better profits. They are the market trends and the performance of a particular PSU Bank Index.

Conclusion

The PSU bank ETFs invest in assets of the PSU Bank Returns Index. So they offer investors a unique opportunity to participate in the performance of the public sector banking industry in India. Moreover, they are a convenient way to diversify the portfolio. Yet, they are a bit risky. So, an investor should thoroughly research all the vital factors before investing in any PSU bank ETF.