PSU mutual funds defy market slump in 2026 with strong three- and five-year returns

With equities on a steady downward spiral due to a host of factors, including the war in the Middle East, is there any sliver of hope left in the space? While most equity mutual fund (MF) categories have slipped into the red during the short-term and have not generated great returns in the three and five-year timeframe, funds that invest in shares of PSUs (Public Sector Units) have been an exception. MFs, which deploy money exclusively in shares of PSUs, are among the only three equity fund categories that have given positive returns so far in 2026. Incidentally, the category is the best performer among equity funds in the three and five-year horizon offering investors 30.5% and 27.3% (as on March 11) returns on an annualised basis during the timeframe. Data as on March 11, 2026 While the best performer among equity PSU MFs surged nearly 29% in the last one year, the worst performer declined by about 5.6% during the period. But there are only a handful of funds (seven to be precise) to choose from in the category. And the portfolios of these funds are heavily stacked in favour of PSU banks and companies engaged in the energy and utilities businesses. State Bank of India (SBI), Bharat Petroleum Corporation (BPCL), Bank of Baroda and NTPC are among the top picks of equity MFs investing in PSUs. The scrips of these PSUs have been among the best performers on the bourses. While the SBI scrip has soared by 49.3% in absolute terms during the last one year compared to the 5.7% recorded by NIFTY-50 index, Bank of Baroda surged by 42.8%, BPCL increased by 22.9% and NTPC was up by 17.4%. “The strong performance of equity mutual funds investing in PSU stocks has largely been driven by a combination of earnings recovery, valuation re-rating and policy support,” said Rajani Tandale, senior vice president, mutual fund, 1 Finance, a personal finance advisory firm. “PSU funds delivered strong returns driven by valuation re-rating from historically low levels, with stocks moving from cheap to reasonable valuations,” said Swati Jain, CEO, Wealth, Arihant Capital Markets. With many PSUs having presence in infrastructure-related sectors, the government’s increased focus on them has had a positive impact on companies. The allocation for infrastructure spending, as a percentage of GDP (gross domestic product), has increased from 1.13% in 2019-20 to a projected 3.2% in 2026-27. If the government continues to spend big on infrastructure, PSUs would gain. PSUs saw an uptick in their fortunes in tune with the government’s spending on the sector to improve the overall economy, say experts. “Over the past few years, PSU banks have significantly improved their balance sheets with a sharp decline in NPAs, while the government’s sustained infrastructure and capital expenditure push has supported sectors such as defence, power and energy where many PSUs operate,” Tandale said. “These funds also benefited from starting at relatively depressed valuations, so the rally reflected both improved fundamentals and a market re-rating of the sector,” she said. The union government’s sustained commitment to infrastructure-led economic growth with increase in capital expenditure to a record ₹12.2 lakh crore in the budget for 2026.27, alongside the proposed ‘Infrastructure Risk Guarantee Fund’, meaningfully improves project viability, enhances risk-sharing, and will further mobilises long-duration institutional capital, say industry experts. Can the category sustain the momentum? Advisors say that these funds would not be able to match the current performance. “Expecting the same pace of returns going forward may not be realistic. From here, performance will depend more on earnings delivery and execution rather than valuation expansion,” Tandale said. “Power generation companies like NTPC and GAIL, shipping companies like SCI, fertilizer companies like NFL, RCF will face pressure due to higher input costs (due to the Iran-Israel war). This can affect the performance of the overall PSUs in the medium term,” Jain said. “The structural capex cycle, governance reforms, strong order books will help PSUs in the long term. The future returns from these funds will depend far more on earnings growth and actual execution of government capex plans,” she said. How much should investors allocate to thematic funds such as equity MFs investing in PSUs? “Investors should also recognise that sectoral or thematic calls, including PSU-focused strategies, are inherently high-risk bets because they involve concentrated exposure to a narrow segment of the market and are often linked to policy cycles,” Tandale said. “Go for PSU or any thematic funds only if you have a high-risk appetite, lots of patience to endure negative and below-industry average returns for a few years and also have the know-how of when to get in and out of these funds,” Jain said. “For most retail investors the core of the portfolio should remain in diversified categories such as flexi-cap funds, which offer broader market exposure and better risk diversification over long investment horizons,” Tandale said. “Invest in well-diversified flexi cap funds, so the fund manager can do the job for you,” Jain said.