According to the Association of Mutual Funds in India (AMFI), the total number of investor accounts or folios reached 27.06 crore as of 28 February 2026. Mutual fund categories like equity, hybrid, and solution-oriented schemes witnessed maximum investment from the retail segment at 20.64 crore. Given such widespread participation of individual investors, the modern mutual fund industry of India has modernised to include different fund categories, with unique asset mixes, to cater to the varying return and risk requirements of investors. In this ever-evolving landscape of Indian mutual funds, an equity savings fund has emerged as a popular structured investment vehicle for moderate-risk investors.
The equity savings funds in India create a trifecta of equity growth, debt stability, and arbitrage efficiency. Whether it is an amateur or a seasoned investor, this fund category might be able to meet the different investment requirements, providing access to a well-balanced portfolio, due to its hybrid nature. This blog decodes the equity savings fund, one of the low-volatility hybrid mutual funds, in detail.
What Are Equity Savings Funds?
An equity savings fund is a type of hybrid mutual fund that creates a trifecta, meaning it invests in equity, debt, and arbitrage opportunities to provide investors with capital appreciation, along with a controlled risk profile. This is the most defining feature of an equity savings fund; unlike most hybrid funds, this category not only invests in equity and debt but also in arbitrage opportunities.
The most defining feature of an equity savings fund comes from its definition based on asset allocation laid down by SEBI. According to this, the total equity exposure of these funds, including both net equity and arbitrage, must be at least 65% of the total portfolio. This unique equity allocation guideline is a regulatory design to qualify the fund for equity taxation, despite having a significant portion of the portfolio in low-risk assets.
Let us analyse the asset allocation structure of the equity savings funds in India since it is fundamental to their meaning.
How Do They Work? Structure & Asset Allocation
An equity savings fund is a hybrid fund with equity and debt allocation, along with an arbitrage opportunity. Discussed below are the SEBI mandates regarding its allocation into different assets and investment opportunities.
- Total Equity Exposure: An equity savings fund can invest 65% or more of its total assets into equity and equity-related assets.
- Net Equity Exposure: The actual amount of a fund’s corpus invested in the stock market equities, after adjusting for any hedge, is called the net equity exposure. For example, if a fund invests 80% into stocks but uses strategies like 30% derivative investment to reduce risk, the net equity exposure becomes 50%.
SEBI mandates equity savings funds to hold 15-40% of total assets as net equity exposure. This is the actual growth engine of equity savings funds. The fund managers invest directly into listed equity shares, aiming to generate capital appreciation over the medium to long term.
- Debt Allocation: Equity savings funds can invest at least 10% of their total assets into debt instruments.
- Arbitrage in Hybrid Funds: Equity savings funds can invest in arbitrage opportunities. The process of simultaneous purchase and sale of an asset in different markets to benefit from a temporary price difference is called arbitrage. According to the SEBI mandate, the maximum arbitrage exposure of the fund has to be disclosed in the Scheme Information Document (SID).
- SID Regulations: Besides the maximum arbitrage exposure, SEBI also specifies that the equity savings funds have to mention the minimum hedged and unhedged exposure in their SID.
Furthermore, the fund managers of equity savings funds dynamically change their asset allocation and investment strategy to fit the dynamic market conditions. For instance, during a bull run, when markets have high valuations, managers may reduce the net equity components and increase arbitrage exposure, thereby reducing risk without losing equity taxation benefits. Similarly, during corrections, the net equity component may be increased to benefit from the upside potential.
The table below summarises the SEBI mandate regarding the asset allocation of equity savings funds.
| Asset | Percentage Allocation (%) |
| Total Equity Exposure | 65% and Above |
| Net Equity Exposure | 15-40% |
| Debt | 10% |
| Arbitrage Opportunities | Allowed, but no percentage limit is explicitly mentioned |
This unique asset allocation discloses the key equity savings mutual fund benefits that create a bridge between growth-centric equity assets and fixed-income or stability-centric assets like FDs, debt funds, etc.
Benefits Over FDs and Debt Funds
The equity savings fund curates its equity and debt allocation to benefit from the capital appreciation and tax-saving opportunity of equity assets, whilst ensuring portfolio stability through debt investment. These funds create a balanced mix of equity, debt, and arbitrage opportunities, which gives them an edge over traditional FDs and pure debt funds. Discussed in this section are the key benefits of equity savings funds over assets like pure debt funds and fixed deposits.
- Higher Return than Debt and FDs: Equity savings funds allocate at least 65% of their total portfolio into equity and equity-related assets, out of which 15-40% is the net equity allocation. This allows equity savings funds, a hybrid fund with equity and debt allocation, to gain capital appreciation. On the contrary, FDs and pure debt funds have little to no equity allocations, resulting in fixed, stable returns, lower than equity savings funds.
- Better Liquidity than FDs: Investors have to bear a penalty and interest loss if they attempt to prematurely withdraw funds from a fixed deposit. Furthermore, tax-saving FDs have lock-in periods. On the contrary, equity savings fund investors can liquidate their units at the prevailing Net Asset Value (NAV), post the minimum exit load. There is no penalty in the case of an equity savings fund.
- Cover Against Inflation: Although fixed-income assets like FDs offer stable returns, they are often inefficient in combating the effect of inflation. For instance, if the rate of inflation is 2% and an FD interest is 6% p.a., the effective return would be 4%. In such a scenario, equity savings funds can offer returns that can diminish the impact of inflation, due to their equity allocation, whilst mitigating risk and ensuring portfolio stability with debt.
- Lower Volatility Than Pure Equity Funds: While equity savings funds offer greater capital appreciation opportunities than pure debt funds and fixed deposits, they also offer greater stability than pure equity funds. The arbitrage and debt allocations provide a necessary hedge against market volatility.
Equity savings fund lies at a sweet spot between high risk and return equity assets and low risk and return debt or fixed-income assets. The table below summarises the key differentiations between equity-savings funds, pure debt funds, and fixed deposits.
| Parameters | Equity Savings Fund | Debt Fund | Fixed Deposit |
| Return Expectations | Moderate to High | Low | Moderate |
| Risk | Low to Moderate | Low | Nil |
| Liquidity | High | High | Low |
Another key advantage of this asset class is its taxability.
Tax Treatment of Equity Savings Funds
According to the new taxation rule, applicable from 23 July 2024, if a hybrid mutual fund has 65% or more equity allocation, it is taxed as per the equity mutual fund tax slabs. However, if the equity allocation is less than 65%, it is taxed like a debt fund. Since equity savings funds have 65% or more equity allocation, according to SEBI guidelines, they are taxed as per the equity fund tax slabs.
Let us now discuss the equity savings fund taxation system through its STCG and LTCG rates.
STCG & LTCG Tax Rates (Post-July 2024)
As discussed before, the equity savings fund taxation system is based on the equity fund rates because these funds have 65% or more equity allocation. Furthermore, the tax rate also differs based on the tenure for which the asset is held. The table below shows equity savings fund tax rates, based on their holding tenure.
| Parameter | Tenure | Tax Rate |
| Short-Term Capital Gain | Held for 1 year (12 months) or less | 20% + Cess |
| Long-Term Capital Gain | Held for more than 1 year (12 months) | 12.5% (levied above the ₹1.25 Lakh exemption limit |
Therefore, the equity savings fund taxation is one of its other key advantages. Since equity savings funds incur equity fund taxation, they have two key benefits.
- Long-term capital gains from equity savings funds are exempted up to ₹1.25 Lakhs. For example, if Mr X gains ₹2 Lakhs from liquidating his equity savings fund units held for 2 years, he would have to pay 12.5% tax on ₹75,000 (₹2,00,000 – ₹1,25,000).
- Imagine a taxpayer who falls under the 30% income tax slab. Since fixed deposits and debt funds are taxed at applicable tax slabs, he would have to incur a comparatively high tax liability. However, equity savings funds have a fixed tax rate, despite his tax slab, making his tax liability on such investments lower. Therefore, for high-income investors who fall under high tax slabs, equity savings funds offer tax efficiency.
Now that we understand the theoretical structures and codes that make equity savings funds efficient, let us explore how these funds operate in the real world.
Performance Examples & AUM Data
The table below shows the top equity savings funds, selected based on their asset under management, as of 20 March 2026, along with their performance and risk metrics. Note that all the funds listed below are direct growth.
| Fund Name | AUM (₹ Crore) | 3-Year Return (%) | 5-Year Return (%) | Standard Deviation (%) | Sharpe Ratio (%) |
| ICICI Prudential Equity Savings Fund | 18,027.21 | 8.49 | 8.03 | 1.95 | 1.74 |
| Kotak Equity Savings Fund | 9,853.13 | 11.77 | 10.57 | 4.50 | 1.53 |
| HDFC Equity Savings Fund | 5,901.18 | 10.64 | 9.95 | 3.76 | 1.61 |
| SBI Equity Savings Fund | 5,731.16 | 11.74 | 9.34 | 4.17 | 1.58 |
| DSP Equity Savings Fund | 3,758.43 | 10.76 | 9.41 | 2.93 | 1.86 |
However, despite the different equity savings mutual fund benefits, there are certain risks that investors must be cautious of.
Credit & Interest Risk
Like any investment medium, equity savings funds in India are prone to certain risks. Discussed below are some of them.
- Credit Risk: The risk of a debt issuer defaulting on the interest or principal payment is called credit risk. Since a key portion of equity savings funds is invested in debt instruments, these assets are susceptible to credit risk.
- Interest Risk: This also comes from the debt component of equity savings funds. When new bonds with higher interest rates enter the market, the existing bonds appear less attractive, resulting in a fall in market value.
- Market Risk: At least 65% of the fund’s portfolio is invested in equity, resulting in its susceptibility to stock market volatility.
Therefore, considering these risks, investors must prioritise optimal research before investing to ensure that the asset fits their risk profile. Furthermore, optimal diversification minimises dependence on one category, resulting in an optimised portfolio.
FAQs
An equity savings fund is a type of hybrid mutual fund that makes investments in three different asset classes, namely debt instruments, arbitrage positions, and net equity. It offers less volatility than pure equity stock funds while maintaining at least 65% equity exposure (net and arbitrage), making it eligible for equity taxes.
According to the SEBI categorisation of mutual funds, at least 10% of the equity savings fund’s total assets must be invested in debt. The total equity exposure should be 65% or more, while the net equity exposure must be within 15-40%. The remaining band of the total equity can be dedicated to arbitrage positions.
Given the 65% or more asset allocation mandate of SEBI for equity savings funds, these assets are taxed as per the equity fund tax rates. Gains made on units held over 12 months are taxed as LTCG at 12.5%, above the ₹1.25 lakh exemption limit. On the other hand, gains on units held under 12 months are taxed as STCG at 20% plus cess.
The hybrid mutual fund taxation policy, that is, the system of taxing hybrid funds with 65% or more equity allocation with equity tax rates, has not changed post-2024. However, since the equity fund tax rates have changed, the effective tax on equity savings funds is now different. Post-July 2024, STCG from units held under 12 months is taxed at 20%, up from 15%. LTCG from units held over 12 months is taxed at 12.5%, up from 10%, with the annual exemption raised to ₹1.25 lakh. The qualifying holding period of 12 months also remains unchanged for equity savings funds.
Whether an investment medium is better or not depends on the individual risk appetite, goal, and overall profile of an investor. An asset that is better for one individual might not be better for another. Generally, equity savings funds offer a higher capital appreciation opportunity than fixed deposits, due to their equity allocation. This also raises this risk profile compared to FDs. Therefore, investors must consider their goals and needs to choose an asset that fits them better.
According to Asset Under Management (AUM) as of 20 March 2026, the top five equity savings funds in India include, ICICI Prudential Equity Savings Fund, Kotak Equity Savings Fund, HDFC Equity Savings Fund, SBI Equity Savings Fund, and DSP Equity Savings Fund. These are all direct growth funds. There 3-year performance range from 8.49% to 11.77%. However, investors must analyse the latest data for through research.
Similar to any investment, equity savings fund have their own set of risks. Some key risks include credit risk and interest risk, which stems from the debt component of these assets. Furthermore, due to their 65% or more equity investment, the fund is also prone to risks emerging from market volatility.
