Mutual funds continued to increase their exposure to public sector banks (PSU banks) in September 2025, reflecting renewed institutional optimism toward state-owned lenders. The sector’s allocation in mutual fund portfolios rose to 3.3%, up 30 basis points (bps) from July and August, and 70 bps higher year-on-year — signalling growing conviction in the improving fundamentals of PSU banks.
This uptrend comes as PSU banks strengthen their balance sheets, deliver consistent earnings, and demonstrate robust credit growth across retail and corporate segments.
Rising Weight in Benchmark Indices
The growing institutional interest has also translated into a higher market representation. PSU banks now constitute around 3.5% of the BSE 200 index, underlining their increasing market relevance. Fund managers are rotating capital into these lenders, drawn by their improving asset quality, attractive valuations, and strong dividend yields.
The shift also coincides with broader risk aversion in volatile markets, as investors look for stability and predictable returns.
Strong Earnings and Targeted Accumulation
The surge in holdings was led by key state-run lenders. State Bank of India (SBI) featured among the top five stocks by value gain, with 15 mutual funds increasing their exposure.
Among specific fund actions:
- Invesco Mutual Fund acquired 99.18 lakh shares of Bank of Baroda,
- Quant Mutual Fund purchased 2.28 crore shares of Canara Bank,
- Indian Bank, however, witnessed a 1.7% decline in mutual fund holdings.
This selective accumulation reflects confidence in large-cap PSU banks’ consistent profitability and efficiency improvements.
ETF Momentum: Investors Eye PSU Banking Basket
Investor appetite for PSU lenders has also extended to exchange-traded funds (ETFs), offering diversified exposure. Over the past six months, eight new PSU-focused ETFs have been launched, allowing investors to benefit from the sector’s resurgence.
Top-Performing Nifty PSU Bank ETFs (as of September 2025):
| Rank | ETF Name | 1Y Return | 3Y Return | 5Y Return | Expense Ratio |
| 1 | Nippon India ETF Nifty PSU Bank BeES | 16.7% | 155.2% | 512.1% | 0.49% |
| 2 | ICICI Prudential Nifty PSU Bank ETF | 16.8% | 45.9% | 45.9% | 0.40% |
| 3 | HDFC Nifty PSU Bank ETF | 16.8% | 15.9% | 15.9% | 0.35% |
| 4 | Kotak Nifty PSU Bank ETF | 17.4% | 14.2% | 14.2% | 0.49% |
| 5 | DSP Nifty PSU Bank ETF | 17.0% | 11.5% | 11.5% | 0.15% |
Among these, Nippon BeES leads in long-term performance and liquidity, ICICI Prudential’s ETF offers efficiency with moderate costs, while DSP’s ETF, though cheapest, has relatively lower trading volumes.
Shift Away from Private Banks
In contrast, mutual funds continued to pare exposure to private sector banks for the third consecutive month, with holdings dropping to an eight-month low of 17.3%. Meanwhile, allocations to non-banking financial companies (NBFCs) climbed to 5.8%, the highest level in 17 months.
This portfolio rebalancing indicates a clear rotation toward stability and margin expansion, as state-run banks maintain healthy credit growth, declining NPAs, and better return ratios.
Outlook
The consistent rise in PSU bank exposure underscores a broader institutional shift in sentiment, as investors favour high-quality public sector lenders with solid fundamentals over growth-oriented but volatile private banks.
With the sector continuing to post strong earnings and asset quality improvements, mutual fund interest in PSU banks is likely to remain elevated in the coming quarters.
Disclaimer:
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