Should you invest in Equity Savings Funds?


Conservative investors who are moving from deposits to mutual funds or those worried about a full-equity portfolio’s volatility and wanting a small allocation to stocks can consider equity savings funds.

What are equity savings funds?
Equity savings schemes belong to the hybrid category. They invest in a mix of equity, debt and arbitrage opportunities. A scheme in this category invests in both equity and debt securities, employing a combination of three investment strategies — pure equity (net long), arbitrage and debt. The net long equity exposure helps generate capital appreciation, while arbitrage opportunities and allocation to debt securities provide income and generate stable returns.

How is this category of funds taxed?
The portfolio of these schemes is structured in such a way that the corpus set aside for investing in stocks and arbitrage remains above 65%. Due to this, they are classified as equity mutual funds for taxation. With equity taxation, investors pay 15% for short-term capital gains for investments held for less than a year; and 10% long-term capital gains, investments are held for more than a year.

How do these funds work?
Equity could constitute 65-90% of the portfolio of which arbitrage opportunities could be 25-75%, unhedged equities 15-40% and debt and money market instruments 10-35%. If the fund manager is positive on equities, higher could be the proportion of the same in the portfolio. Conservative fund managers typically keep it at 15-35%, with the equity part being invested primarily in large-caps. The debt portion too is conservatively managed largely invested in AAA rated paper or government securities with low duration.

How has the past performance of such funds been and who should invest?
Over the last three years, as per data from Value Research, this category of funds has given a return of 7.9%. Distributors feel these funds work well for investors eyeing more than fixed deposit returns over three years, investing in mutual funds for the first time or those worried about high volatility in pure equity funds. These funds suit investors eyeing equity exposure but do not have a very long-term horizon and want low volatility. They fit those with a 1-3 year time frame who come in for equity taxation which is lower than that for debt oriented funds for a short tenure.

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