Have A Low Risk Appetite Yet Want To Invest In Equities? Equity Savings Funds Are For You

It is a fact that mutual funds are subject to market risks, and they do not provide guaranteed returns. However, different types of mutual funds carry different types of risk.

Of course, equity mutual funds carry a higher amount of risk and can provide higher returns. However, the element of risk can make many wary of investing in equity mutual funds.

Equity Savings Fund
This is where equity savings funds come in. “These funds invest in a combination of equities, debt and arbitrage opportunities. They have to invest a minimum of 65 per cent in equities, which gives these category of funds taxation benefit of equities. This overall equity position is divided into directional equities with direct stock exposure and also fully hedged portion through the use of arbitrage strategies,” says Abhishek Tiwari, Executive Director and Chief Business Officer, PGIM India Mutual Fund.

Through equity savings an investor thus gets an exposure to fixed income and arbitrage, which aims to offer consistent returns and also invests in equity assets for market returns. “The mandate generally is to dynamically allocate assets across fixed income, arbitrage and equities. The gross equity exposure is over 65 per cent and includes active equity exposure and arbitrage investments. Active equity exposure can vary from 20 per cent to 50 per cent, with the balance being covered through arbitrage positions,” says Pratish Krishnan, Fund Manager and Senior Analyst at Baroda BNP Paribas Mutual Fund.

Risk Profile
Equity savings funds simply have lower impact of equity market volatility as proportion of assets deployed in equity is lower as against pure equity products or even against aggressive hybrid categories. “If an investor has a long term investment horizon, and wants to have lower allocation to equity as an asset class, then the investor can opt for this product instead of a pure equity product. Since the current view on debt as well as equity markets is constructive, this product can be considered by investors with a long term investment horizon,” says Sanjay Bembalkar, Co-Head Equity at Union Mutual Fund.

Thus investors who are not comfortable investing 100 per cent in equity can use equity savings funds to park their investments. “These funds can be ideal for first time equity investors who wish to participate in equity but are also looking for some stability.  These funds typically carry low to moderate risk,” says Tiwari.

Tax Treatment
Equity savings funds have a tax benefit over debt funds. As mentioned before, they have to invest a minimum of 65 per cent in equities so they are taxed as normal equity funds. After April 1, 2023, debt funds have lost their tax edge as all gains are now taxed under income tax slab rates without any indexation benefit.

How They Compare With FDs
Equity mutual funds are safe, but can they be compared to fixed deposits (FDs)? Fixed deposits are fixed yielding securities whereas equity savings funds are hybrid funds with certain levels of equity exposure. “Thus, there exists a potential to earn higher than FD returns in the long term for equity savings funds, as equities can be expected to outperform other asset classes, albeit at a slightly higher risk but with a big benefit of attracting equity taxation,” says Krishnan. 

According to Value Research, equity savings funds as a category have returned 14.53 per cent, 8.91 per cent and 8.89 per cent over a one year, three year and five year periods. However, the returns are not guaranteed unlike in the case of bank fixed deposits.

Equity savings funds are ideal for investors with a low risk appetite who still want some equity exposure. These funds offer potentially higher returns than fixed deposits and are taxed as equity funds. While not guaranteed, equity savings funds can provide a good balance of risk and reward.