What is an Equity Savings Fund?

An open-ended mutual fund scheme that predominantly invest in equities, arbitrage, derivatives and debt securities to generate returns is known as Equity Savings Fund. This new mutual fund category was launched recently, under the classification Hybrid Mutual Funds. It aims to provide investors an opportunity that is relatively safer than other equity schemes and qualifies for taxation rules for equity mutual funds.

It invests in equities and derivative strategies to keep the equity exposure of the fund at 65%, and the rest is allocated to fixed income securities. This makes these funds a better alternative to fixed deposits, as the latter is taxed according to income slab of investor, whereas the former is taxed at 10% if the holding period exceeds 1 year.

Features of Equity Savings Funds

• Offers Quality Returns
  Equity Savings Fund have given consistent returns over the past few years, with less uncertainty. Use of arbitrage, which involves capitalizing on price fluctuation of securities in different markets, is one of the dominant strategies used by these funds to generate returns. Consistent returns in the short term makes them a perfect investment avenue for investors looking to park their money for a short duration.

• Moderate Risk Exposure of the Portfolio
  The investment portfolio of Equity Savings Fund consists of  equity and debt securities, and arbitrage opportunities. The portfolio has appropriate allocation to these three financial instruments as per the market sentiment, which mitigates market risk, associated with the equity investment. If the fund manager foresee any market correction in the near future, s/he can reduce the equity allocation of the portfolio in order to contain losses effectively, and keep the risk exposure of the portfolio at a moderate level.
• Tax-Efficient
  Equity Savings Fund are more tax-efficient when compared to debt mutual funds. While the former is eligible for equity taxation rules, the latter is imposed with debt taxation rules, wherein the tax is comparatively higher. Higher returns compared to debt funds, and almost equal risk exposure, and better tax efficiency, make equity savings funds a good alternative to debt mutual funds.

How does Equity Savings Funds work?

Like any other hybrid mutual fund scheme, Equity Savings Funds invest in a mix of equity and debt securities to make capital gains. Although they follow a conservative investment strategy to allocate their resources and create a low-risk investment portfolio.

Assets are safeguarded from any volatility and market risk through active use of derivative strategies. However, some of the  equity investment is unhedged i.e., unsecured, which determines the increase in returns.

Who should invest in Equity Savings Fund?

• Since the launch, this fund type has gained extreme popularity among the investors who were looking for a low-risk equity scheme. Equity Savings Fund is a secure investment avenue with returns comparable to that from equity schemes.
• Investors who have a short term investment horizon and want amplified returns to increase their wealth should opt for Equity Savings Fund. As these funds carry low-risk, they’re suitable for conservative investors who want an investment instrument like bank fixed deposits to earn returns
• Also, Equity Savings Fund are suitable for short term investment, not long term wealth creation. For instance, if you are near your retirement age and want to create a corpus during your retirement, you can invest in these funds for that purpose. It is to be noted that Equity Savings funds are not a good substitute for pure equity funds, as the latter yields better returns in the long run.

How to select an Equity Savings Fund in India

Before you start, you must consider the following points while selecting an Equity Savings Fund to invest in India-

• Risk involved– Since Equity Savings Funds are a type of Hybrid funds, they involve lesser than when compared to pure equity funds. However, the level of risk may not be ignored considering which portfolio should be rebalanced accordingly.
• Returns offered– The performance of underlying securities may affect the NAV of these funds, resulting in fluctuations in the returns due to market movements.
• Investment Horizon– These funds may be considered for investments for the medium term. A duration of around 5 years would be considered ideal for investments in Equity Saving Funds.
• Taxation- Since these funds invest 65% of their assets in equities, they are taxed as equity investments. If the units are sold before one year from the date of allotment, Short Term Capital Gains (STCG) of 15% will be applied (plus 4% cess). If the units are sold after one year, Long Term Capital Gains (LTCG) of 10% (plus 4% cess) will be applied, provided the gain in a financial year is more than Rs. 1 Lakh.

Apart from these, you must have a look at the fund’s past performances, its AUM, Expense Ratio, etc. before you make a choice. Comparing various funds in the category and then making the wise choice is imperative.

How to invest?

There are two ways through which a person can invest in Equity Savings Funds:

• Online

You can invest in Equity Savings Funds online seamlessly through online platforms (such as Paisabazaar.com) or directly through the websites of the Asset Management Companies (AMCs), offering the fund.

• Offline

This conventional mode of investment requires an investor to fill a form and submit it at the nearby branch of the fund house, or invest through a broker.

To know more about the investment procedure for mutual funds, visit: How to invest in Mutual Funds?

Best Equity Savings Fund to Invest

Here is a list of top 5 Equity Savings Fund that have shown consistent performance and one can consider investing in these funds:

{Data as on February 10, 2020; Source: Value Research}

{The Funds have been ranked as per their 3 year returns}

FAQs on Equity Savings

Ques: What is Hybrid Equity Savings Fund?

Ans: Hybrid Equity Savings Funds are open-ended, new category of funds, investing in equity, arbitrage and debt securities. These funds invest a minimum of 65% of their assets in equity and equity related securities. A minimum of 10% securities must be invested in debt funds or fixed income securities.

Ques: What is SBI Equity Savings Fund?

Ans: SBI Equity Savings Fund is an open-ended scheme having 76% of its investments in equity and equity-related securities and the remaining in debt securities. The scheme aims to generate income by investing in arbitrage opportunities in the cash and derivatives segment of the equity market, and capital appreciation through moderate exposure in equity.

Ques: Should you replace fixed deposits with an equity savings fund?

Ans: If your investment horizon exceeds 1 year and you can afford to take a little risk with your investments, you must invest your funds in an equity savings fund instead of investing in bank fixed deposits as these funds tend to offer higher returns for the given time period in comparison to the fixed deposits, along with various tax benefits.