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Equity Savings invests the entire fund amount across equity funds, debt funds, and arbitrage, presenting a relatively recent financial instrument in the Indian money market. This approach of diversifying fund investments plays a crucial role in mitigating the volatility associated with the stock market.
What distinguishes Equity Savings Fund is its unique investment strategy, setting it apart from traditional schemes. In this scheme, around 30%-35% of the total investment corpus is allocated to equity assets, while the remaining portion is distributed between debt income funds and arbitrages. Operating somewhat like balanced funds, Equity Savings Fund has the advantage of incorporating arbitrages.
By investing in a combination of different segments, these funds effectively enhance investment returns while managing risk and reward intelligently. Consequently, this savings scheme becomes an excellent choice for conventional investors seeking high returns on their investments. It also proves to be an ideal option for individuals aiming to generate capital to meet short-term goals in the near future.
Read to know what is equity savings fund in detail here.
An overview of Equity Savings Fund
So, what is equity savings fund? An equity savings fund represents a mutual fund designed to offer investors a blend of equity, debt, and arbitrage opportunities. Typically, these funds invest a segment of their assets in equities (30%-40%), presenting the potential for capital appreciation. Concurrently, they allocate another portion (25% to 35%) to debt securities and employ arbitrage strategies (25% to 35%) to manage risk and amplify returns. The arbitrage strategy capitalises on market price differences to generate profits.
Therefore, the predominant nature of these funds, constituting two-thirds or more, aligns with fixed income characteristics due to the fixed income nature of arbitrage. In contrast, one-third or less is dedicated to equity.
How do Equity Savings Mutual Funds work?
Achieving diversification in a portfolio through the assistance of Equity Savings Scheme serves multiple objectives for investors. The list of equity savings funds predominantly channel investments into the stocks of diverse companies, with the asset allocation varying based on market conditions, encompassing Small-cap, Mid-cap, or Large-cap stocks. The remaining funds are strategically invested in debt instruments and other market assets.
The inclusion of an arbitrage component in the portfolio plays a dual role: it safeguards against downside risk while concurrently ensuring a consistent income stream from debt-related instruments.
What is the purpose of Equity Savings Fund?
- Mitigating risk- Equity savings mutual funds offer investors a means to minimise the volatility and downside risk often linked with direct stock investments. Through diversification across various asset classes and sectors, these funds act as a buffer against the impacts of market fluctuations, ultimately augmenting returns over the long term.
- Capital appreciation- The list of equity savings funds enable investors to achieve returns surpassing those of fixed deposits or other conventional investment choices by engaging in the growth potential of the stock market. Investors can capitalise on capital appreciation over an extended period by investing in reputable companies boasting robust fundamentals and competitive advantages.
- Diversification of funds- Equity savings fund offers investors the opportunity to diversify their portfolios across various asset classes and sectors. This diversification aids in lowering overall risk and optimising returns by leveraging different opportunities in diverse markets.
- Income generation- Equity savings funds have the potential to assist investors in generating consistent income through dividends or interest payments, achieved by investing in debt instruments or seizing arbitrage opportunities.
Who should Invest in an Equity Savings Scheme?
Equity Savings Scheme presents an ideal investment choice for individuals seeking exposure to equities but lacking the timeframe for long-term commitments. These funds are characterised by lower risk levels while being designed to yield specific returns, distinguishing them from other equity assets. Moreover, certain funds within this category may offer regular dividend incomes, although such payouts are not obligatory.
Hence, investors who are averse to the volatility of the equity market can find equity savings mutual funds well-suited to their preferences. Additionally, those embarking on their investment journey and seeking alternatives to traditional saving options may find the ESS portfolio appealing. Furthermore, investors with an investment horizon of fewer than 24 months can fulfill their requirements with this investment option.
Nevertheless, it’s important to note that these funds should not be considered substitutes for other funds solely focused on equities, particularly those with long-term investment portfolios. Prior to investing, careful consideration is advised.
What are the significant merits of Equity Savings Funds?
Equity Savings Fund offers investors a range of advantages, and here are some of them summarised.
- The growth and capital appreciation provided by the equity component are balanced by the arbitrage element, which, while limiting upside potential, also constrains the associated risk.
- The arbitrage position not only capitalises on the riskless spread between cash and futures but also provides opportunities to trade on market volatility. Instances where a positive arbitrage turns negative, can yield above-normal profits for the fund.
- The collaboration of equity, arbitrage, and debt within these funds delivers a blend of growth, wealth creation, hedging, opportunities in market volatility, consistent and steady investments, capital protection, and more.
- Equity savings funds demonstrate notable tax efficiency, primarily because ESS is typically treated as equity funds for taxation purposes. This leads to reduced tax liability in both Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) scenarios.
- Lastly, this investment option provides a robust model for portfolio diversification by effectively combining three asset classes. Acting as a fund of funds, Equity Savings Funds leverage fund managers’ expertise to amalgamate the best categories, ensuring optimal returns and risk management for investors.
Equity savings funds designate a defined portion of equity as collateral to optimise returns in the investment portfolio. Consequently, the exposure to both equity and derivatives is collectively regarded as equity allocations. As a result, these funds are classified as equity assets for equity savings fund taxation purposes.
If an investor realises long-term capital gains of up to Rs. 1 lakh from equity assets and stocks, these gains remain exempt from equity savings fund taxation. Any capital gain exceeding this threshold is subject to a 10% tax rate. In cases where the investor holds the funds for less than 12 months, the tax rate for short-term capital gains is 15%.
Equity savings funds have the potential to assist investors in attaining their financial objectives through the generation of consistent income from dividends or interest payments, coupled with capital appreciation resulting from stock price movements. Nevertheless, it’s important to note that these funds come with certain risks, including interest rate risk, inflation risk, lack of control, and others, which investors should be mindful of before making an investment decision.
Equity Savings funds typically allocate 30-35% of their portfolio to equities, with the remainder divided between arbitrage and debt. This structure significantly diminishes their overall risk, given that only a small portion of the portfolio is invested in stocks.
On average, Equity Savings Funds have yielded returns of 10.24% per annum over the past five years. The annualised returns for the 3-year and 10-year periods stand at 10.41% and 9.43%, respectively.
Since Equity Savings Funds invest in a combination of equity, debt, and arbitrage opportunities, they are suitable for investment durations of 1 year and beyond.
Equity Savings Funds divides its investments into three segments. The first segment involves equities, providing portfolio diversification. The second segment focuses on arbitrage positions, aiming to generate risk-free returns by exploiting market mispricing opportunities. The third segment is dedicated to debt, typically carrying minimal interest rate risk or credit risk.