Balancing Act: An In-Depth Look at Equity Savings Funds
Equity Savings Funds, also known as Balanced Savings Funds, are a category of mutual funds that combine asset classes debt, equity, and arbitrage opportunities. Equity save funds are subject to the same tax treatment as equity funds because they contain a minimum of 65% in shares. While they offer a longer growth horizon than pure equities funds, equity save funds are more reliable.
Equity funds have gained popularity in recent years due to their approach to balancing risk and returns. In this article, we will take an in-depth look at equity savings exploring what they are, how they work, and whether they might be a suitable addition to your investment portfolio.
What is the Equity Saving Fund?
One kind of hybrid category mutual fund that offers investors a mix of debts, equity, and arbitrage investments is an equity savings fund. These funds are designed to provide investors with a balanced exposure to both equity markets and fixed income markets, while also taking advantage of arbitrage opportunities.
Perhaps equity save funds are not as well-known as their other mutual fund, the equity-linked savings scheme, or ELSS, which is eligible for section 80C tax benefits. But recently, investors have become interested in them, particularly in light of the new tax laws about debt mutual funds.
Equities
Equities Savings Funds allocate a certain portion of their portfolio to investments in stocks. The equity component can vary from fund to fund, but it typically ranges between 20% to 40% of the total assets. This allocation to equities allows investors to benefit from potential capital appreciation. Equities offer the potential for high returns but are also subject to market volatility.
Debts
A significant portion of the fund’s portfolio is invested in debt securities such as bonds. The fixed income component aims to provide stability and regular income to the fund, making it less volatile than pure equity funds. These debt securities offer a predictable stream of interest or dividend income.
Arbitrage Opportunities
Equity Funds employ an arbitrage strategy as a part of their investment approach. Arbitrage involves simultaneously buying and selling assets to profit from price differentials. In the case of these funds, arbitrage can be done between the cash and future markets, exploiting the price differences. This approach helps in generating additional returns while keeping the overall risk relatively low.
How Equity Savings Funds Work
Equity Savings Funds are designed to strike a balance between generating returns and managing risk effectively. To achieve this, they employ several key strategies.
Asset allocation
The fund manager is responsible for deciding the allocation of the fund’s assets among equities, fixed income, and arbitrage opportunities. This allocation is dynamic and is based on market conditions, the fund’s investment strategy, and the fund manager’s assessment of risk and return potential.
Safe Guarding
To manage risk, these funds often use derivatives like futures and options to safeguard their equity exposure. They aim to reduce the downside risk in their equity holding. By using derivatives, they can limit potential losses in the equity market while still participating in any upside potential.
Tax Efficiency
Equity Save Funds are structured to be tax-efficient. They are treated as equity funds for tax purposes in many countries, including India. This means that investors may benefit from lower tax liabilities on their gains compared to fixed income funds.
The scheme invests a minimum of 65% in equity, including the derivation part, which makes the taxation at par with equity funds. Any gains from an equity fund after a holding period of one year are treated as long term capital gains which are currently exempted from taxation.
In the case of non-equity funds, you have to hold the investments at least for three years to qualify as long term capital gains which are taxed at 20% with indexation. Short-term capital gains from non-equity funds are added to your income and taxed at the applicable income tax slab. Investors in higher tax brackets (20% or 30%) end up paying a huge chunk out of the returns as tax.
Equity Save Scheme also invests around one-third of the corpus in stocks and the rest in a combination of debt and arbitrage.
Regular Income
The fixed income component of the fund generates a regular income stream in the form of interest or dividends. This can be particularly beneficial for investors seeking a steady source of income in addition to potential capital appreciation.
Risk Management
The blend of assets in Equity Savings is designed to manage risk effectively. The fixed income and arbitrage components act as a cushion during market downturns, while the equity component provides growth potential. This diversification helps reduce the overall portfolio volatility.
Benefits and Drawbacks of Equity Savings Funds
As with any investment option, Equity Funds come with their own set of advantages and disadvantages.
Benefits
Diversification
These funds offer diversification across asset classes, reducing risk while maintaining the potential for returns.
Steady Income
The fixed income component provides a regular income stream, making them attractive for income-oriented investors.
Tax Efficiency
They are treated as equity funds for tax purposes, potentially leading to lower tax liabilities on gains.
Professional Management
These funds are managed by experienced professionals who make dynamic asset allocation decisions.
Risk Management
Safeguarding strategies are employed to mitigate risk in the equity portion of the portfolio.
Liquidity
They provide a degree of liquidity, although typically with a lock-in period.\
Drawbacks
Limited Equity Exposure
The equity component is capped at a certain percentage, limiting the potential for capital appreciation compared to pure equity funds.
Fees
Like all mutual funds, equity savings funds have associated fees and expenses, which can impact overall returns.
Market Dependency
They are still influenced by market conditions and may not be entirely immune to market downturns.
Lock-in Period
Some equity savings may have a lock-in period, limiting your access to invested capital for a certain time.
Performance Variation
The performance of these funds can vary widely depending on the fund manager’s strategy and market conditions.
Should You Invest?
Now that we have explored how equity savings function, it’s crucial to decide if they match your investment goals. These funds offer more extended growth potential compared to pure equity investments, but they are also more dependable. They suit conservative investors who are wary of putting all their money into stocks prefer slightly higher returns than fixed-income options, and want a balanced approach to their investments. If you fit this description, Equity Savings might be the right choice for you.
Conclusion
Equity Savings offer a balanced mix of equities, debt instruments, and arbitrage opportunities. These funds are well-suited for conservative investors seeking a reliable option with a longer growth horizon. While they provide a unique blend of assets, potential investors should carefully consider their financial objectives and risk tolerance before investing. Consulting with a financial advisor and considering investing in SIP is advisable to make an informed decision.
