Equity savings funds are open-ended mutual fund schemes in which the investments are spread across equity and debt funds and arbitrage securities. This category of mutual funds was introduced by SEBI in 2017 as part of its mutual fund recategorization exercise. As per SEBI regulations, the fund should have at least 65 percent of investments in equities and at least 10 percent of the fund should be debt holdings.

These funds can invest in equity and equity related instruments, debt securities, and arbitrage securities through hedging strategies. Since the exposure is spread across both equity and debt instruments, diversity is maintained and the overall risk factor gets flattened. Investments are also made in arbitrage opportunities which enable fund managers to navigate through asset classes based on market conditions thus making the fund less prone to market whirlwinds.

Use of hedged and unhedged strategies are also a feature of equity savings schemes. A part of the equity component is hedged which mitigates the risk factor of the funds. The unhedged chunk of the fund ranges between 20 to 30% which aids in capital appreciation. 40 to 70% is allocated to completely hedged equity positions and this helps in generating arbitrage or risk-free profits. 10 to 35% of the portfolio is invested in fixed income and money market instruments for income generation purposes. Due to this structure, almost 70-80 percent of the assets have low volatility and can be relied on as a steady source of income while the active equity allocation taps into the power of equities for wealth creation in the long run.

Equity savings schemes are treated as equity assets for the purpose of taxation. If the long term (holding period of more than 12 months) capital gains from equity assets and stocks are less than Rs. 1 Lakh, then no tax liability will be imposed and gains exceeding Rs 1 lakh are taxable at 10%. The short-term capital gains (holding period less than 12 months) are taxable at 15%. This makes it a more tax efficient option that pure debt funds of the fund are held for more than a year.

• Arbitrage: Arbitrage is a trading practice wherein one buys an asset from one market and sells it in another market so they can profit from the minor differences in the asset’s listed price. When markets are volatile, arbitrage can generate comparable or even higher returns than liquid funds. Fund houses use arbitrage to create low-risk returns and thus equity savings schemes are a prudent investment option of investors who do not have high risk appetites.
• Less Volatility: Since investments are spread across between debt and arbitrage holdings, these funds are more immune to the market ups and downs than pure equities. Also, the arbitrage option further helps tackle volatile phases by capitalizing on the differences in the prices of funds in different markets.
• Diversity: Instead of having to individually choose a bunch of funds for maintaining adequate diversification in your portfolio and then tracking the performance of each one of them, you can be spared of a lot of hassles by investing in equity savings schemes. You can rest assured that the fund managers will choose the right funds and your diversity requirements will be met efficiently.

Equity savings mutual funds are a suitable choice for investors who want equity exposure but in a short to medium term timeframe. Since these funds have exposure to debt and arbitrage opportunities, they carry considerably less risks than pure equity funds and the equity allocations makes them a better bet than pure debt funds in terms of the returns generated.

Investors who are new to the world of equities but are averse to the high risks can try their hand at dabbling with equities through these funds without going overboard with their risk-taking abilities. Also, given their tax liability is less than that of debt funds, it makes them an appropriate option for investors who want to lower their tax burden. These funds are also a great choice for investors who want to move away from the conventional investing routes such as fixed deposits and recurring deposits.

For information on one-time KYC (Know Your Customer) process, Registered Mutual Funds and procedure to lodge a complaint, refer to the knowledge center section available on the website of Mirae Asset Mutual Fund

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.