An equity savings fund, as per SEBI’s definition, is one of the lower (not to be mistaken with Low) risk investment instruments categorized as Equity for taxation purposes. However, it can invest in equity and debt instruments as well as arbitrage opportunities using hedging positions.
Whereas, the equity component offers growth and appreciation of capital, the upside can be constrained but resultantly, risk is also limited due to the inbuilt arbitrage component.
The arbitrage portion of these funds allows the biggest advantage as far as stable returns are concerned.
Essentially, it seeks to capitalize on pricing inefficiencies in the equities market’s cash and derivative components. As a result, the fund’s overall stock exposure is partially hedged, lowering volatility as compared to an aggressive hybrid fund with wholly unhedged equity exposure.
Since these funds invest in both stock and debt, they are less risky than pure equity funds. However, because the performance of the underlying instruments affects the NAV of the funds, returns might change with market fluctuations. They are however known for providing relatively consistent returns in the long term.
Typically, an investor with moderate risk appetite focus on a financial horizon of three-five years can opt for equity savings funds. This way, return expectations can be slightly more than debt fund returns, and it would be possible to tide over market dips in the short term.
While traditional investments like Fixed Deposits (FDs) offer stability, they might fall short in terms of wealth accumulation. On the other hand, equity savings funds strike a harmonious balance among equity, arbitrage, and debt, providing stability with growth potential. The historical performance of the Nifty Equity Savings Index showcased lower volatility than pure equity indices such as the Nifty 50 Total Return Index, offering a smoother ride for conservative investors.
These funds, as mentioned earlier, qualify to be taxed in the category of Equity. For any mutual fund to have equity taxation a minimum of 65% of net assets must be invested in equity or equity related instruments.
The tax applicable on this category as of September 2024 in case of Short Term Capital Gains (STCG) is 20% for equity funds sold before 12 months and for Long Term Capital Gains (LTCG) is 12.50% for equity funds sold after 12 months. It is worth noting that, LTCG tax only applies to gains exceeding Rs 1.25 lakh.
However, even within this category, some funds are more aggressive and their pure equity exposure is closer to the permitted 45% while others are more conservative and range closer to the lower ceiling of 15%.
In the next column, we shall focus on the asset holding patterns and performances of some randomly selected Equity Savings Funds.
(Views expressed here are personal)
ASHOK KUMAR
Head of LKW-India.
He can be reached at ceolotus@hotmail.com