When Indian mutual fund investors discuss thematic and sectoral funds, the conversation typically gravitates toward energy, pharma, IT, or manufacturing. Yet, a look at returns over the last three to five years tells a different story. One category has quietly outperformed all of them: PSU (Public Sector Undertaking) mutual funds.
PSU funds have delivered an average annualised return (CAGR) of 27.51% over three years and 25.01% over five years — surpassing every major thematic category and the vast majority of equity mutual fund categories during this period. Only certain commodity-oriented funds — primarily those tracking gold — have occasionally kept pace, and not consistently.
This raises three questions worth examining: What drove this run? Was it broad-based or driven by a handful of stocks? And what does the longer-term picture say about whether this momentum can continue?
How PSU funds stack up against other themes
A direct comparison of returns across major thematic categories over three, five, and ten years puts the PSU outperformance in clear perspective.
| Thematic Fund Category | 3-Year CAGR (%) | 5-Year CAGR (%) | 10-Year CAGR (%) | Rank (3Y / 5Y) |
| PSU Funds | 27.51 | 25.01 | 16.43 | 1st / 1st |
| Infrastructure Funds | 21.37 | 20.49 | 16.55 | 2nd / 2nd |
| Manufacturing Funds | 21.26 | 17.31 | — | 3rd / 3rd |
| Energy Funds | 19.79 | 15.06 | 17.14 | 4th / 4th |
Returns are average CAGR across funds in each category with complete track records. 10-year data for manufacturing funds is not available due to limited fund history.
Over both three and five years, PSU funds topped the rankings. Their closest competitor — infrastructure funds — trailed by roughly six percentage points on a three-year basis (27.51% vs 21.37%) and by around four and a half points over five years (25.01% vs 20.49%).
The ten-year data introduces an important nuance. Energy funds lead the long-term table with a CAGR of 17.14%, followed by infrastructure at 16.55% and PSU funds at 16.43%. The gap is narrow, but it does confirm that PSU funds were not always the category leader — the outperformance is a more recent phenomenon.
This matters because it tells investors something useful: the PSU rally is real and sustained over several years, but market leadership does rotate. The sector that leads today is rarely the sector that leads a decade from now.
What fuelled the PSU surge?
PSU funds did not become top performers overnight. Their strong returns were backed by several policy and business changes over the last few years.
One of the biggest factors was the government’s push on infrastructure spending. Capital expenditure increased sharply, with higher spending on railways, roads, power, defence and other infrastructure projects. Since many large companies in these sectors are government-owned, they directly benefited from new orders and business opportunities.
Another major trigger was the turnaround in PSU banks. A few years ago, many government banks were struggling with bad loans. But after cleaning up their balance sheets, profitability improved significantly, leading to a strong rally in PSU banking stocks.
The government’s focus on defence manufacturing under the Atmanirbhar Bharat initiative also helped several defence PSUs secure large orders.
Finally, many PSU stocks started their rally from relatively low valuations. As earnings improved and investor confidence returned, these stocks were re-rated by the market, helping PSU funds generate exceptional returns.
Top-performing PSU funds
The outperformance at the category level was broadly replicated at the fund level. Of the 13 funds currently listed in the PSU category on Value Research, only three active funds have a complete five-year track record. All three delivered strong returns, and notably, none strayed far from the category average — suggesting that the theme itself, rather than individual stock-picking, was the primary return driver.
| Fund Name | 3-Year CAGR (%) | 5-Year CAGR (%) | 5-Year Rank |
| Aditya Birla Sun Life PSU Equity Fund – Direct Plan | 28.23 | 25.18 | 1st |
| SBI PSU Fund – Direct Plan | 30.39 | 25.01 | 2nd |
| Invesco India PSU Equity Fund – Direct Plan | 26.84 | 23.96 | 3rd |
| Category Average | 27.51 | 25.01 | — |
Returns as of May 31, 2025. Direct plans only. Source: Value Research.
The spread between the best and worst performing fund over five years is just 1.22 percentage points — an unusually tight range for an equity fund category. When individual fund performance clusters this closely around a category average, it indicates that beta (broad theme exposure) dominated alpha (manager skill). Investors would have done well simply by being in any PSU fund, not necessarily the best one.
What makes PSU funds attractive
Beyond the recent return record, there are structural arguments that some investors find compelling:
Policy-linked earnings visibility: PSU companies in infrastructure, energy, and defense tend to benefit directly and quickly when government spending priorities shift. For investors who want exposure to India’s capital expenditure cycle, PSU funds are one of the most direct vehicles.
Dividend income: Many public sector companies have statutory obligations or strong track records of dividend payouts — providing investors with regular income alongside capital appreciation.
Residual valuation buffer: Despite the re-rating of recent years, several PSU stocks still trade at discounts to private sector peers. If profitability improvements continue, further re-rating remains possible — though this is not guaranteed.
The risks that come with this category
The same factors that drove strong returns also define the risks going forward. Investors should weigh these carefully before allocating.
Concentration risk: PSU funds invest within a defined universe of government-owned companies. Unlike diversified equity funds, there is no flexibility to rotate into private sector leaders if PSU stocks underperform for an extended period.
Policy dependence: Performance is closely tied to government decisions — CapEx budgets, disinvestment plans, sector-specific regulations, or changes in the subsidy regime. A policy reversal or fiscal consolidation that reduces spending can quickly dampen earnings growth.
Cyclicality: PSU stocks have historically moved in prolonged cycles — extended rallies followed by multi-year periods of sluggishness. The current three-to-five-year run is consistent with past up-cycles, which eventually turned.
Valuation risk: Following the sharp rally, PSU stocks are no longer cheap by historical standards. Much of the re-rating may already be priced in, which limits the valuation tailwind that amplified past returns.
Higher volatility: As thematic funds, PSU funds tend to fall more sharply than diversified categories during sector-specific downturns or broad market corrections.
Who should and should not consider PSU funds
Financial advisors generally recommend treating thematic funds as satellite allocations — a small portion of a larger, diversified portfolio — rather than the core of an investment strategy. This guidance applies directly to PSU funds.
PSU funds may be worth considering for investors who:
-Already hold a diversified equity portfolio (flexi-cap, large-cap, or index funds) and want targeted exposure to India’s public sector capex cycle.
-Have a minimum five-to-seven year investment horizon and the temperament to hold through cyclical downturns.
-Understand that thematic funds can underperform the broader market for extended periods and are comfortable with that risk.
They are generally not suitable for:
-First-time mutual fund investors building a core portfolio.
-Investors with low risk tolerance or short investment horizons.
-Anyone allocating to PSU funds primarily because of recent three-to-five-year returns — a historically unreliable basis for thematic fund selection.
Summing up…
PSU mutual funds have delivered the strongest returns among major thematic categories over the past three and five years, driven by a confluence of government capital expenditure, a PSU banking turnaround, defense indigenisation, and valuation re-rating. The story is real, the data is clear, and the underlying drivers were structural rather than speculative.
But the ten-year picture is a reminder that no theme leads indefinitely. Energy funds held the long-term crown before PSUs took it. The risks — concentration, policy dependence, cyclicality, and stretched valuations — are as real as the returns that attracted attention to this category in the first place.
For investors who understand these trade-offs and are building on an already-diversified portfolio, a measured allocation to PSU funds can make sense. For those chasing the numbers alone, the history of thematic investing offers a consistent warning: by the time a theme becomes obvious, a large part of the return is often already behind you.
Data as of May 31, 2025. Source: Value Research. Returns for direct plans; past performance is not indicative of future results.
Disclaimer: Past performance is not indicative of future returns. Mutual fund investments are subject to market risks. The returns mentioned in this article are based on historical data and are for informational purposes only. Investors should carefully assess their financial goals, risk appetite and investment horizon, and consult a qualified financial advisor before making any investment decisions. PSU funds are thematic funds and may carry higher concentration and volatility risks than diversified equity funds.
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