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 Hybrid Mutual Funds classification. 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 the income slab of the investor, whereas the former is taxed at 10% if the holding period exceeds 1 year.
How does Equity Savings Funds work?
Like any other hybrid mutual fund scheme, Equity Savings Fund 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, which determines the increase in returns.
Why invest in Equity Savings Fund?
- Good 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 make them a perfect investment avenue for investors looking to park their money for a short duration.
- Moderate Risk
The investment portfolio of Equity Savings Fund consist of both equity and debt securities. Since the majority of assets are allocated to debt securities and derivatives, the market risk associated with equity remains mitigated.
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.
If the holding period is less than 1 year, Short Term Capital Gains Tax is levied, which currently stands at 15%. If the holding period is more than 1 year, the tax levied stands at 10%.
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.