Equity Savings Funds: Low-Volatility Hybrid Investment

What is a Equity Savings Funds?

An equity savings fund is an open-ended, equity-oriented hybrid scheme that invests a primary portion of its portfolio in equity securities and arbitrage opportunities and a portion in debt instruments.

Advantages of Equity Savings Funds

Stable returns

With investment in equity arbitrage opportunities and debt instruments, equity savings funds help lower equity volatility and deliver stable returns.

Portfolio diversification

Enjoy a diversified portfolio with exposure in equity stocks, equity arbitrage opportunities and debt instruments. Plus, the portfolio is professionally managed to maximise returns while keeping the risks low.

Tax efficiency

Being equity-oriented funds, you can benefit from the long-term capital gains tax on equity and earn tax-free returns up to Rs.1 lakh if you stay invested for 12 or more months.

Lower Volatility

The inclusion of arbitrage and debt components helps to dampen the overall volatility typically associated with pure equity funds, offering a more stable investment experience.

Equity Savings Funds Returns Calculator

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Invest once with the facility of lump sum investing and save at your will. Time the market correctly and earn good returns.

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Understanding Equity Savings Funds

Table of Contents

What are equity savings funds?What are the features of equity savings funds?What are the different types of hybrid funds?How do equity savings funds work?What is the tax implication of equity savings funds?What are the payout options?Who should invest in equity savings funds?

What are equity savings funds?

Equity savings funds are equity-oriented hybrid mutual funds which invest at least 65% of their portfolio in equity stocks or arbitrage opportunities. A minimum of 10% of the portfolio is allocated to debt to stabilise volatility risks.

What are the features of equity savings funds?

Minimum 65% allocation in equity and equity arbitrage opportunities
The volatility risk is quite low, while returns are good
Suitable for all investment horizons
Invest through SIPs or lump sum
Earn tax-free returns up to Rs.1 lakh if you stay invested for 12 months or more

What are the different types of hybrid funds?

Aggressive Hybrid Funds

Funds that invest 65% to 80% of their portfolio in equity and the rest in debt

Arbitrage Funds

Funds that invest a major portion of their portfolio in equity arbitrage opportunities and gain from the underlying price difference

Balanced Hybrid Fund

Hybrid funds which invest 40% to 60% of the portfolio in equity and the remainder in debt

Multi-Asset Allocator Fund

Funds that invest at least 10% of the portfolio in three different asset classes

Conservative Hybrid Fund

Hybrid funds which invest 75% to 90% of the portfolio in debt and the remainder in equity

How do equity savings funds work?

Equity savings funds collect investments from different investors and pool them into a corpus
Fund managers identify equity allocation and allocation to arbitrage opportunities in the equity markets
The proportion of hedged and unhedged portfolio allocation is specified in the scheme document
A minimum of 10% of the portfolio is also invested in debt instruments
Arbitrage opportunities are when the price of an equity security is different in the spot or cash market and the futures or derivatives market
Fund managers use this price differential to earn returns from arbitrage opportunities
Equity and debt instruments provide growth through price fluctuations and interest generation
Risks are low since the price across the spot and futures market would differ even in a bearish market, and debt instruments offer stable returns.

What is the tax implication of equity savings funds?

Equity savings funds attract equity taxation on the capital gains earned since they primarily invest in equity and its arbitrage opportunities
Returns up to Rs.1 lakh are tax-free if you stay invested for 12 or more months
Returns exceeding Rs.1 lakh are taxed at 10%
For redemption within 12 months, returns are taxed at 15%
Dividends earned, if any, are taxed at your income tax slab rate

What are the payout options?

Dividend option

Earn dividends on your investment at regular intervals
Growth option

Accumulate the returns over the investment tenure and get a lump sum amount on redemption

Who should invest in equity savings funds?

New equity investors

You can benefit from the low volatility risk and enjoy stable returns
Investors looking to invest in equity

The equity savings fund will be a good choice if you want to invest in equity at a reduced risk.
Investors with a short-term investment horizon

If you want to invest for a short tenure, equity savings funds can give better returns and tax efficiency than liquid funds

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FAQs On Equity Savings Funds

The unique investment strategy and pattern of equity savings funds make it different from other mutual funds . It essentially invests in equity, debt and arbitrage opportunities and gains through price inefficiencies in the derivatives and cash segments of equity markets. It provides a balance between equity and debt, unlike other equity or debt mutual funds which predominately invest in debt or stock funds and focus on the fixed income instruments.

Equity savings funds are seen as an alternative to debt funds as it has an optimal asset allocation between debt and equity instruments with 30-35% of the investment in equities, 25-35% in equity arbitrage and the rest in the debt instruments, ensuring a balance reward-risk proposition. The debt allocations of the scheme provide stability and reduce the overall volatility of the scheme.

Equity savings funds have a diversified investment portfolio. These funds are hybrid mutual funds which invest their amount equally in equity and stocks, risk-free hedging instruments like arbitrage opportunities and debt and FD-like instruments with stable income. Equity savings funds offer better returns than FDs of similar duration.

For regular and disciplined savings, one can invest in equity savings funds through Systematic Investment Plans (SIP).

The expense ratio of equity savings funds varies for different mutual funds. It is typically lower than pure equity funds. It is necessary to check the expense ratio of the specific equity savings funds before investing.