Public Sector Undertakings (PSUs) have been around for decades—born in the early years of independent India to build and stabilize key industries. These legacy institutions have laid the foundation for sectors like energy, banking, and infrastructure, and many continue to play a dominant role even today. Their long-standing presence gives them a sense of stability and scale that few others can match.
Over time, as PSU stocks were disinvested, they found their way into the portfolios of millions, largely through direct investments, but also through index funds. More recently, with passive investing gaining momentum, more and more investors are curious about how PSU stocks feature in index funds, how they have performed, and what role they can play in a long-term investment plan.
This blog explores the evolving role of PSUs in the index investing—and what it could mean for your portfolio.
What Are Index Funds and How Do They Work?
Index funds are a simple way to invest in the overall market without trying to outsmart it. These are mutual funds or ETFs that don’t rely on expert stock-picking. Instead, they simply copy a specific market index—like the Nifty 50, Sensex, or even sector-based indices.
Think of it this way: if you invest in a Nifty 50 index fund, you're basically buying a tiny slice of all 50 companies in the Nifty 50, in the exact same proportion as the index. No guesswork, no chasing trends—just steady exposure to the broader market.
The result? You get the benefit of diversification, lower costs, and returns that closely mirror the market’s overall performance. It's a no-fuss way to stay invested and grow your wealth over time.
How PSU Stocks Contribute to Index Funds
PSU stocks—companies that were set up by the government and/or where the government may still hold a majority stake—aren’t just important players in the economy, they also have a solid presence in many key stock market indices. You’ll find some of the biggest PSUs in well-known indices like the Nifty 50, Nifty Next 50, Nifty PSU Bank Index, and Nifty CPSE Index.
Their inclusion isn’t random—it’s based on factors like market size, how actively their stocks are traded, and their importance in their respective sectors. And here’s the key part: when an index fund tracks one of these indices, it’s required to include all PSU stocks that are part of it, no matter how those stocks are performing in the short term.
So if you own an index fund, chances are you already have some exposure to PSUs—whether you planned for it or not!
Benefits of Investing in Index Funds with PSU Stocks
Here are some compelling reasons why it’s worth having index funds that include PSU stocks in your portfolio:
1. Diversification with a touch of stability
PSUs tend to operate in crucial sectors like banking, power, oil & gas, defence, and infrastructure—areas that form the backbone of the economy. Because these are essential services, PSUs often stay more stable even when markets get a bit rocky. So, having them in your index fund can help balance out risk.
2. A front-row seat to India’s growth journey
The government plays an active role in boosting the economy through big infrastructure projects, banking reforms, and energy transitions. Since PSUs are often at the centre of these plans, they’re in a good position to benefit from these large-scale initiatives. Being part of index funds that include these stocks means you automatically participate in this momentum.
3. Value buys with long-term potential
PSU stocks have traditionally traded at lower price-to-earnings (P/E) ratios compared to their private sector peers. In simple terms, that means you could be getting more value for your money. For long-term investors, this can be a smart way to enter the market at relatively attractive prices.
4. Regular income through dividends
One of the standout features of many PSUs is their generous dividend pay-outs. These are profits shared with shareholders—and when PSUs are part of your index fund, that dividend income can add a nice boost to your overall returns over time.
Key PSU Stocks in Popular Indian Index Funds
Here are some prominent PSU constituents across key indices:
| Index | Key PSU Stocks | Highlights |
| Nifty 50 | - State Bank of India (SBI) - ONGC - Coal India | SBI is a leading PSU bank with strong fundamentals. ONGC and Coal India are key energy providers. |
| Nifty Next 50 | - Power Finance Corporation (PFC) - Bharat Electronics Limited (BEL) - REC Limited | Prominent PSUs in power finance and defence electronics with consistent performance. |
| Nifty PSU Bank Index | - Bank of Baroda - Canara Bank - Punjab National Bank and other PSU banks | Covers all major public sector banks in India. |
| Nifty CPSE Index | - Select CPSEs based on performance, dividends, and return on capital | Focuses on high-performing central PSUs with strong financial metrics. |
Even niche PSU companies, sometimes categorized as best PSU penny stocks, are present in sectoral or thematic indices, giving broader exposure through index funds.
How Government Reforms Affect PSU Stocks in Index Funds
PSU stock performance often moves in sync with government policies. When the government announces reforms—like disinvestment plans, privatization moves, or increased capital spending—it can have a direct impact on PSU stock prices, and in turn, the NAVs (Net Asset Values) of index funds that hold them.
Here are some typical triggers and the impact that they could have:
Because these funds are so closely tied to the country’s economic direction, PSU-heavy index funds can be an exciting opportunity—especially for investors who like keeping an eye on policy changes and the broader economy.
Risks Associated with PSU Stocks in Index Funds
While PSU stocks come with their own set of strengths, they also have some challenges you should be aware of:
1. Government involvement can be a double-edged sword
Since the government owns a majority stake, it often calls the shots. This can sometimes lead to slower decision-making or priorities that aren’t always business-first, which might affect how efficiently the company runs.
2. Policy uncertainty can create jitters
A change in government, leadership, or even a tweak in regulations can lead to uncertainty. And since PSUs are so closely tied to policy, they can be more sensitive to these shifts than other companies.
3. Not always the top performers in a booming market
During strong bull markets, private companies—especially those in tech or high-growth sectors—can race ahead with innovation, speed, and better profit margins. PSUs, on the other hand, may not move as fast or deliver the same kind of returns.
And here’s the thing with index funds: they don’t get to pick and choose. If a PSU stock is in the index, it’s in the fund—regardless of performance. So as an investor, it’s important to understand both the upside and the risks that come with PSU exposure in your index fund.
Why Investors Should Include PSU Stocks in Their Portfolio
PSU stocks could bring some strong advantages to a portfolio, especially when you're investing through index funds.
For investors who are looking for value, income, and a mix of sectors—PSU exposure through index funds can be a smart and steady way to play the long game.
Comparing PSU Stock Performance to Private Sector Stocks in Index Funds
Over the last few years, PSU stocks have seen a revival, outperforming in many cases:
While private players continue to dominate in innovation and tech, best performing PSU stocks have shown that with reforms, they can compete and win in both returns and reliability.
How to Invest in Index Funds with PSU Stocks
Investing in index funds with PSU exposure is straightforward:
Conclusion
PSU stocks, once viewed as slow-moving, are now making waves in the Indian market. Through index funds, investors can gain structured exposure to all PSU stocks, including the best PSU bank stocks, best PSU penny stocks, and best PSU stocks for long term wealth creation.
As India continues its infrastructure and digital journey, PSU companies are playing a pivotal role. For investors, this makes a compelling case for adding PSU-rich index funds to their portfolios—for growth, stability, and diversification.
Frequently Asked Questions
How do PSU stocks contribute to index funds?
PSU stocks form an integral part of many key indices like Nifty 50, Nifty PSU Bank Index, and CPSE Index. Index funds tracking these indices must hold PSU stocks in the same proportion, ensuring their contribution to the fund’s performance.
What are the benefits of investing in index funds with PSU stocks?
Benefits include sectoral diversification, attractive valuations, dividend yields, and participation in policy-driven growth, making them suitable for long-term investing.
Are there risks associated with PSU stocks in index funds?
Yes. Risks include government intervention, policy uncertainty, and occasional underperformance compared to private sector peers.
How can I invest in index funds with PSU stocks?
You can invest through any brokerage or investment platform. Choose funds that track indices with PSU exposure, such as Nifty PSU Bank Index Fund or CPSE ETF.
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