These funds invest in a mix of stocks, debt instruments and arbitrage opportunities
Investors seek to strike the right balance between risk and returns while making investments. Within hybrid mutual funds, equity savings funds have emerged as a new category to achieve this objective. Let's explore how equity savings funds (ESF) make it happen.
What are equity savings funds?
They are moderately high-risk hybrid mutual funds. These funds invest in a mix of stocks, debt instruments and arbitrage opportunities. It lowers the overall volatility in the fund value owing to significant corrections in the market. The combined allocation to equity and arbitrage may be nearly 60% of the total asset allocation.
The equity portion of the portfolio aims at boosting the overall returns whereas the debt portion offers stability to the portfolio. The fund manager explores arbitrage opportunities via derivative investments to lower the net equity exposure. The resultant portfolio is not only well-diversified, but also a stable returns generator.
Who may invest?
Investors who need a stable source of income may find ESF suitable. At the same time, those who want a regulated exposure to equity markets may also venture into these funds. Additionally, investors nearing retirement within a span of around three years may opt for these funds. It will help them to grow wealth while keeping the market risk at lower levels.
Investors may follow either the systematic investment plan (SIP) route or the one-time investment mode. The budding investors and those with a regular income stream may adopt the SIP route. It will help to tone down the anxiety of timing the market. They may also enjoy averaging of cost of investments.
The ones approaching retirement may park their corpus as a lump sum. Upon reaching retirement, they may opt for a systematic withdrawal plan (SWP) to create a reliable pension system.
Features and benefits:
Equity Savings Funds came into being after the Security and Exchange Board of India's re-categorisation exercise. Soon after the launch, these funds have emerged as a reliable investment product among many investors. The critical feature of ESF are.
Moderate risk: The equity component is relatively lesser in ESF as compared to pure equity funds. This makes ESF less risky than pure equity funds. It also renders a comparatively stable market value to the portfolio.
Stable returns: Undoubtedly, these funds are subject to moderately-high market risks. Still, investors may enjoy an opportunity to earn a steady rate of return on their investments. This makes them a go-to for investors who have a low-risk appetite or are nearing retirement age.
Tax benefits: Equity savings funds are treated at par with equity funds for taxation. When they are held for over one year, the long-term gains up to Rs 1 lakh will be tax-free. The long-term gains in excess of Rs 1 lakh will be taxed at 10% without the benefit of indexation. If the units are redeemed within one year, then the short-term gains are taxed at 15%. Also, dividends on equity savings funds are exempt from tax in the hands of investors.
Diversified portfolio: Investors looking for a well-diversified portfolio may find equity savings funds suitable. These funds offer the benefits of diversification by distributing investment across various avenues. This helps to balance the volatility of the equity market with the stability of debt instruments and arbitrage instruments.
Equity savings funds may be opted by investors who can stomach moderate risks in their portfolio. But before finalising your investment decision, conduct a thorough analysis of the fund's risk-return aspect.
The writer is founder and CEO, ClearTax
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