Prime Fund Recommendation – Capturing the PSU Rerating Opportunity

With inputs from Aarati Krishnan

Thematic funds, if chosen right, can give your portfolio returns a leg-up, when the chosen theme outperforms markets. The challenge, however, is in spotting such themes when they are out of favour and exiting them when they are the toast of the market. 

The theme in this report is PSU. Select Indian public sector undertakings (PSUs) appear to offer a tactical opportunity today, combining multi-year sectoral tailwinds, sharp valuation discount, and policy-driven momentum. After a period of outperformance and subsequent consolidation, PSUs have reverted to a significant discount versus the broader market, with the BSE PSU index trading at a PE of about 12x, much lower than the BSE 500’s 25x. This value gap is significant, especially as most other market pockets remain stretched on valuation, making PSUs one of the few genuine opportunities for mean reversion and rerating in the current cycle.

In the September quarter review of Prime Funds, we added the PSU (public sector undertakings) theme through Invesco India PSU Equity Fund. PSU funds invest in Public Sector Undertakings, which are companies where the central or state government holds a majority stake. PSU companies are primarily found in the energy, financial, and industrial sectors. 

The PSU theme is not anchored to just attractive valuations but also government policy thrust, sectoral reforms, and specific business cycles (defence, green energy, infra). Invesco India PSU Equity’s positioning leverages these tactical strengths and seeks to capture the upside from rerating, earnings momentum, and sector rotation.

The fund and portfolio

Invesco India PSU Equity is well positioned to capture the rerating opportunity in the PSU theme, which has been consolidating for some time now. The fund is managed by Hiten Jain and Sagar Gandhi.

PSU companies are predominantly large-cap. The BSE PSU Index comprises approximately 75% large-cap, 21% mid-cap, and 4% small-cap stocks. The Invesco India PSU Equity Fund is underweight on large caps compared to index, with its average allocation over the past year at 66% large-cap, 25% mid-cap, and 7% small-cap.

As of September 2025, the fund holds a concentrated portfolio of 24 stocks, compared to 63 stocks in the benchmark index. Interestingly, despite having fewer holdings, the fund is less top-heavy, with its top five stocks accounting for 40.57% of the portfolio, versus 43.59% for the index.

The fund’s portfolio P/E and P/B ratios stand at 14.91 and 2.21, compared to 12.42 and 1.87 for the index. This is still a very reasonable PE and indicates that the fund has avoided value traps that are plentiful in the PSU space. 

Leading sectors: Defence, Energy, Industrials

The fund’s sector positioning is as follows: 

• Defence PSUs (17% of the fund) are riding high on increased government spending and import substitution policies, such as the Atmanirbhar Bharat initiative. Major order wins, global competitiveness, and robust profitability underpin multi-year growth prospects. The fund is actively overweight defence, capturing exposure to this rerating theme.​ Overall industrials (which includes the defence theme) and infra PSUs (28% vs 20% for benchmark) participate directly in the infrastructure and capex revival. This pocket is set to gain from the government’s increased allocation and execution of public sector projects.
• Energy and Utilities PSUs (43% fund allocation vs 34% for the index) are beneficiaries of the ongoing domestic capex cycle and energy transition. Holdings like NTPC Green Energy, BPCL and other oil/gas leaders offer strong cash flows, policy tailwinds, and attractive dividend yields at near replacement cost valuations.​

The fund does not hold large PSU index stocks such as Coal India and PFC. This demonstrates selectivity; investing only in PSUs with robust earnings potential. Overweight bets in NTPC Green Energy, BPCL, and select financials (while avoiding vulnerable banks) provide exposure to segments with rerating potential, while avoiding perennial value traps.

PSU theme over different market cycles

The PSU theme has alternated between periods of underperformance and outperformance relative to the broader markets. To assess how the theme fared across these cycles, we examined more than ten years of data of the BSE PSU Index and the Sensex, in three phases: PSUs underperforming, PSUs outperforming, and PSUs consolidating.

As the data shows, the PSU theme can show significant outperformance and give the returns kicker for which one invests in thematic funds. However, timing is critical as underperformance can also be severe. 

Why invest

The PSU basket has diverse sectors, where some companies are perpetual value traps, some are subject to heavy regulation, while some are cyclical. Some segments, such as PSU banks and metal companies currently, are strong businesses under-rated by markets. This apart, as explained above, the PSU theme in general also has a history of long periods of consolidation and correction, followed by sharp rallies. While these rallies have often been spectacular, the subsequent corrections have also been steep, eroding much of the previous gains. Therefore, outperforming in this space needs an active approach to stock selection and strong downside containment. This appears to be a good time for such entry.

The Invesco India PSU Equity Fund has demonstrated its ability to manage this tricky theme conservatively and effectively across multiple cycles. Let’s look at the fund’s performance in detail.

Fund Expenses: The fund’s direct plan has an expense ratio of 0.93%, which is higher than the PSU thematic funds’ average of 0.85%. Its regular plan has an expense ratio of 2.13%, also higher than 2.05%, the average of PSU thematic funds. Considering the expense ratio difference is high at 1.2%, investors should prefer opting for this fund using the direct plan.

Fund Taxation: Belonging to the equity category, this fund is subject to 20% capital gains on short term (less than 1 year) capital gains. The long term (1 year or more) capital gains will be taxed at 12.5% with gains upto Rs.1.25 lakh exempted.

Risks & Suitability

Thematic funds carry higher risk and can experience sharper losses than broader market funds. Therefore, allocation to thematic funds should be limited to a maximum of 10% of one’s portfolio. Investors comfortable with such risks can consider investing in this fund in lump sum or in tranches. It is better to avoid SIPs, as PSU themes have historically seen sharp run-ups in short periods.We may issue Hold or Sell calls on the fund in future when valuations turn stretched.

Investors should also be prepared to hold the fund for extended periods if the PSU theme continues to consolidate. As history shows, when the theme eventually turns around, the rallies tend to be sharp enough to compensate for prolonged underperformance. Those unwilling to wait through such cycles are better off sticking to diversified equity funds and avoid thematic investing.

General disclosures & disclaimers