Investors seeking to balance the risk involved in investment in equities with investment in low-risk options like bonds and fixed deposits can invest in equity savings funds. This category of mutual funds in India adopt a hybrid model wherein they invest equally in stocks, fixed-return instruments and risk-free hedging instruments. Introduced in 2017 as a new category, equity savings funds invest a minimum of 65% of assets in equity and a minimum of 10% in debt securities.
As per SEBI rules, this category of mutual funds in India can invest in equity and equity-related instruments, debt securities and arbitrage opportunities by using hedging strategies.
Features of Equity Savings Funds
What makes equity savings funds different from other hybrid funds is the generation of returns by taking advantage of the arbitrage opportunities.
Some features of this category of funds are:
- It is a diversified fund that spreads the risk by investing in more than one category of financial instruments.
- The fund managers look for ways to exploit the pricing inefficiencies in the cash and the derivative segments of the equity markets. This means that the fund’s overall equity exposure is partially hedged and makes it less volatile than a fund whose equity exposure is totally unhedged.
- The diversified portfolio of these funds makes them attractive for investors willing to take moderate risk but seek capital appreciation and a steady income.
- Investors need to know that the returns of these funds are linked to arbitrage opportunities that may or may not exist.
- While a certain portion is hedged, the remaining is not and thus exposed to the market-related factors that may impact the returns.
- For taxation, these funds are treated as equity funds and are not tax saving funds.
Benefits of Equity Savings Funds
- Safer than Other Types of Mutual Funds– Due to their investment in both equities and debt, this category of mutual funds is considered safer than regular equity funds and more tax-efficient than debt funds. The fund managers have the option to switch between the two categories of asset classes according to the change in the market conditions.
- Better than Equity Funds– The funds invest in arbitrage opportunities by capitalizing on the price fluctuations in the market. While the equity exposure prevents erosion of the investor’s purchasing power, the debt and the arbitrage portion minimizes the downside market fluctuations.
- Tax-Efficient Than Debt Funds– Since the majority of funds in this category of mutual funds are allocated for equity and arbitrage opportunities, it is more tax-efficient than the debt funds if held for more than a year.
Investment in equity savings funds should be made after careful study of the terms and conditions attached to it. Investors also need to study the risk factors that may impact the performance of the fund across various market cycles. Other factors that investors need to consider before investing in an equity savings fund is the extent of diversification, the credit quality of the debt holdings and the turnover cost or the cost of buying and selling of securities.