Why mutual funds are doubling down on PSU banks; is it time to invest in PSU Bank ETFs?

Mutual funds significantly increased their exposure to public sector undertaking (PSU) banks in September 2025, lifting the sector’s weight in their portfolios to a 17-month high, according to data from Motilal Oswal Financial Services. The allocation to PSU banks rose to 3.3%, up 30 basis points from July and August and 70 basis points year-on-year, signalling a clear revival in institutional confidence toward state-owned lenders. The report also noted that the weight of PSU banks in the BSE 200 index stood at 3.5%, reflecting their growing relevance in the broader market.

The increased allocation comes amid steady earnings momentum, improved asset quality, and expectations of a robust credit cycle in the coming quarters. State Bank of India (SBI) was among the top five stocks by value gain in September, with 15 mutual funds adding to their holdings and five reducing exposure. Among notable transactions, Invesco Mutual Fund acquired nearly 99.18 lakh shares of Bank of Baroda, while Quant Mutual Fund purchased 2.28 crore shares of Canara Bank. Conversely, Indian Bank saw its mutual fund holdings fall 1.7% month-on-month to 142.7 lakh shares, indicating selective positioning by fund managers based on valuation and growth potential.

Investor enthusiasm for PSU banks was not limited to actively managed portfolios. The last six months have seen the launch of eight exchange-traded funds (ETFs) focused exclusively on the PSU banking space. A Public Sector Undertaking (PSU) bank ETF is an exchange-traded fund that tracks the performance of a PSU bank index, such as the Nifty PSU Bank Index. Examples of PSU bank ETFs include the Nippon India ETF Nifty PSU Bank BeES, Kotak Nifty PSU Bank ETF, DSP Nifty PSU Bank ETF, and Mirae Asset Nifty PSU Bank ETF. These ETFs allow investors to gain exposure to a diversified basket of PSU bank stocks by buying units on a stock exchange.

These funds have delivered strong returns, led by the SBI BSE PSU Bank ETF, which gained 24.19% over six months. Other strong performers included DSP Nifty PSU Bank ETF (23.71%), Mirae Asset Nifty PSU Bank ETF (23.69%), and Nippon India ETF Nifty PSU Bank BeES (23.48%). Even the lowest performer in the group, the SBI BSE PSU Bank Index Fund, delivered a robust 23.44% return over the same period, underscoring the sector’s strong performance momentum.

Several leading fund houses — including Aditya Birla Sun Life, Bandhan, DSP, HDFC, Kotak, Nippon India, SBI, Sundaram, and UTI Mutual Fund — maintained allocations exceeding 3% to the PSU banking sector. This widespread exposure reflects renewed conviction among institutional investors, supported by better balance sheets, government backing, and stable earnings outlooks.

While PSU banks gained favour, mutual funds trimmed exposure to private sector banks for the third straight month, reducing their weight to an eight-month low of 17.3% in September. The shift suggests a more cautious stance toward private lenders, even as funds diversified into non-banking financial companies (NBFCs), whose weight climbed to 5.8%, also a 17-month high.

Overall, the September trend reveals a broader realignment across financials, as fund managers rotated capital from private banks to PSU lenders and NBFCs, betting on stability, improving margins, and sustained credit growth across India’s state-run institutions.

Nifty PSU Bank ETF

The Nifty PSU Bank ETF segment has delivered robust returns, reflecting renewed investor confidence in state-run banks. Among the top performers, HDFC Nifty PSU Bank ETF led in short-term gains, returning 9.07% in one month and 8.13% over three months. For longer horizons, Kotak Nifty PSU Bank ETF posted the highest one-year return of 17.37%, while Nippon India ETF Nifty PSU Bank BeES dominated the medium to long term with 155.2% over three years and 512.07% over five years. The strong performance across ETFs underscores sustained optimism in PSU banks amid improving balance sheets and stable credit growth.

Top-Performing Nifty PSU Bank ETFs

Rank | ETF Name | 1Y Return | 3Y Return | 5Y Return | Expense Ratio | Assets (₹ Cr) | Liquidity (Volume)
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1 | Nippon India ETF Nifty PSU Bank BeES (PSUBNKBEES) | 16.7% | 155.2% | 512.1% | 0.49% | 3,341.6 | 46.6 L (high)
2 | ICICI Prudential Nifty PSU Bank ETF | 16.8% | 45.9% | 45.9% | 0.40% | 88.9 | 1.27 L
3 | HDFC Nifty PSU Bank ETF | 16.8% | 15.9% | 15.9% | 0.35% | 30.1 | 23.6 K
4 | Kotak Nifty PSU Bank ETF | 17.4% | 14.2% | 14.2% | 0.49% | 1,871.5 | 64.6 K
5 | DSP Nifty PSU Bank ETF | 17.0% | 11.5% | 11.5% | 0.15% | 151.5 | 27.7 K

Insights:
- Nippon PSU Bank BeES leads long-term with 512% 5-year return and highest liquidity.
- ICICI Prudential ETF offers solid 3-year CAGR and low cost.
- DSP ETF is the cheapest (0.15% ER) but least liquid.
- Kotak and HDFC ETFs show steady short-term performance.

For investors

For long-term investors: Nippon PSU Bank BeES.
For cost-conscious investors: ICICI Prudential or DSP PSU Bank ETF.