Equity Savings Funds are a relatively new financial instrument in the Indian investment landscape where the investment is split between equities, debt and arbitrage securities.

While the name suggests a portfolio that leans heavily towards equity markets, Equity Savings Funds typically allocate only 30-35% of the total investment towards pure equities. The remaining 65-70% of the exposure is split between fixed income and arbitrage, lending it a more conservative risk-return balance. This makes it a good option for conservative investors looking to beat inflation from a long-term perspective where interest rates are likely to come down, but are not comfortable with the risk and volatility that equity markets bring.

These open-ended mutual funds were introduced by SEBI in its mutual fund re-categorisation in 2017 and are considered to be safer and less volatile compared to equities and also offer better tax efficiency compared to debt funds. According to SEBI regulations, an Equity Savings Fund must invest a minimum of 65% of its assets into equity, and a minimum of 10% into debt securities. The ideal investment horizon for these investments is 24-30 months.

Read on to know five reasons why Equity Savings Funds are a good investment option in today’s times when debt is back in favour with investors.

1. Stability in returns

Equity Savings Funds deploy a mix of three investment strategies – equity, debt, and arbitrage. However, more than half of the funds are deployed between fixed income and arbitrage. This lends a lot of stability to the portfolio, especially when it is compared to a pure equity investment. The arbitrage component in the investment actually helps to counter the effect of volatility in Capital markets as investors can capitalise on the ups and downs in prices and earn returns on the spread.

2. Diversification of portfolio

An investment in Equity Savings Funds is a combination of three asset classes in one, and fund managers typically combine the best that each of these has to offer to bring the best overall returns for investors. For you as an investor, this translates into a more effective risk-return balance as opposed to a portfolio that is concentrated on one asset class, which can show up a drastic reaction to movements in markets. Moreover, you can gain exposure to each of the asset classes without really having to go into the fine details of each of them. This diversification makes it a good option for investors with a moderate risk profile who are looking for an appreciation of capital and a steady income.

3. Tax benefits

Equity Savings Funds are well-suited for those looking for a tax-efficient investment. For the purpose of taxation, these are placed in the category of Equity Funds, thereby bringing down the tax liability. If you hold the funds for less than one year, you will be taxed under short-term capital gains at a tax rate of 15 per cent. But, if you hold the investment for more than one year, it will be taxed as long-term capital gains at a rate of 10 per cent. Long-term equity gains of less than Rs 1 lakh from equity assets are tax-free.

4. Gains from arbitrage

The risks associated with long-term investments are not applicable to arbitrage trading as these are bought and sold simultaneously. The amount invested into arbitrage, therefore lends the overall investment a lot of stability to the portfolio as these are considered low-risk securities. The price differences may seem small and are short-lived. However, when the returns are multiplied by large volumes, the amounts become impressive and add a lot of value to the overall portfolio.

5. Option of dividend payouts

Some of the fund options under this category also provide investors with dividend income on a regular basis, even though they are not mandated to do so. This payout could be monthly, quarterly, or annual, depending upon the option offered by the fund and the investments chosen by the fund manager. This can act as an additional source of income for investors, over and on top of the gains from the Equity Savings Fund investment.

Disclaimer: An Investor Education and Awareness Initiative by Mirae Asset Mutual Fund

All Mutual Fund investors have to go through a one-time KYC (Know Your Customer) process. Investors should deal only with Registered Mutual Funds (RMF). For further information on KYC, RMFs and procedure to lodge a complaint in case of any grievance, you may refer the Knowledge Centre section available on the website of Mirae Asset Mutual Fund

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


IE Disclaimer

An investor education initiative by Mirae Asset Mutual Fund.

For information KYC process, Registered Mutual Funds and the procedure to lodge a complaint, refer knowledge centre section available on the website of Mirae Asset Mutal Fund.

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