Equity savings funds: Apt for investors looking for stability and tax efficiency | Equity savings funds | IndiaNotes.com
One of the most efficient ways to minimise risk and maximise gainson investments is to diversify. Spreading investment across asset classes – equity and debt – reduces the risk associated with one asset class and ensures balanced returns (growth of capital from equity andstability from debt).
Most retail investors do not have the wherewithal and expertise to allocate between debt and equity or review their portfolios periodically. The domestic mutual fund industry offers several hybrid options to such investors.A recent favourite is balanced funds – minimum 65% exposure to equities and monthly income plansor MIPs(exposure to equities is less than 30%).A new variant in the hybrid fund segment is equity savings funds.
Definition, advantages and asset allocation pattern
Equity savings funds also known as equity income funds attempt to generate returns by investing in equity, fixed income and arbitrage opportunities.Upto 35% of the corpus in these schemes goes to fixed income and over 65% to equities.The equity component is split further – a small part goes to pure equity and the bulk to equity derivatives.
This helps the fund capitalise on arbitrage opportunities or opportunities to earn positive returns based on the price differential between cash and derivatives segments.
Chart 1 shows us difference in asset allocation* compared with balanced funds and MIPs
Equity savings funds deliver stable returns
Over three and five years, the category has returned 13% and 12% more than 11% and 10% given by CRISIL Balanced Fund – Aggressive Index (balanced fund benchmark), respectively.Further, the category has been able to outperform CRISILMIP Blended Fund Index (MIP benchmark)in most periods analysed as seen in the table.
Table 1: Performance of these funds in different periods
Equity savings funds enjoy favourable tax treatment
On the tax front, investors should not confuse equity savings funds with equity linked savings schemes (ELSS). They are completely different.Equity savings funds offer no tax exemptions like ELSS.
However, equity savings funds are more tax efficient than MIPs since they are taxed similar to equity funds – zero long-term capital gains (LTCG) tax if held for more than a year and 15% short-term capital gains tax (STCG) if held for less than a year. MIPs, on the other hand, are taxed similar to debt funds – STCG as per individual tax slabs and LTCG after threeyears of holding period is 20% after indexation.
Diversificationand tax efficiency make equity savings funds more attractive to risk averse investors than debt hybrid funds.Note that returns are linked to arbitrage opportunities which may not always be present in the market. This can hamper a scheme’s performance. Hence, do proper due diligence before investing.