All you need to know about equity savings mutual funds

Mutual funds are emerging as a preferred option for long-term investment. However, a mutual fund category that’s not as widely known is Equity Savings Mutual Funds. These funds invest in a mix of equity, debt and arbitrage opportunities, making them versatile investment vehicles that combine growth potential with some cushioning against risk.

In this article, we will explore what Equity Savings Mutual Funds are, how they work, their benefits, and how they differ from traditional equity funds.

• Table of contents:

• What are equity savings funds?
• How does equity savings mutual fund work?
• Equity savings mutual funds: Key features
• Equity savings fund vs equity mutual funds
• Who should invest in an equity savings mutual fund?
• Equity savings funds: Factors to consider before investing
• How to invest in equity savings mutual funds?

What are equity savings funds?

Equity Savings Mutual Funds are hybrid mutual funds that invest in a mix of equities (stocks), debt (such as bonds), and arbitrage opportunities. This blend aims to provide a moderate return potential while mitigating risk. The growth potential comes from equity, whereas the debt and arbitrage investments provide relative stability and a cushion against volatility.

These funds can be suitable for investors who seek a relatively balanced risk and return profile or those who want exposure to equity markets without taking on too much risk.

How does equity savings mutual fund work?

Equity Savings Mutual Funds are mandated to allocate at least 65% of their corpus to equity and at least 10% to debt instruments. They also need to allocate a portion of their portfolio to hedged and unhedged derivative positions.

Because of their significant equity allocation, these funds are treated like equity funds for taxation purposes. This means that their tax treatment can be favourable when compared to debt funds. Short-term capital gains are taxed at 20%, whereas long-term capital gains (on investments held for more than a year) are taxed at 12.5%, with an exemption of up to Rs. 1.25 lakh. In comparison, capital gains from debt funds are taxed as per the investor’s income tax slab, regardless of the holding period.

Equity savings mutual funds: Key features

Here are some of the key features of equity savings mutual funds:

• Risk-return balance: The combination of equity, debt, and arbitrage ensures a balanced risk-return potential profile.
• Tax efficiency: Gains from these funds are taxed as equity funds, offering tax advantages on long term capital gains (LTCG).
• Diversification: Investments across multiple asset classes reduce dependency on a single market segment.
• Lower volatility: The debt and arbitrage components mitigate the volatility typically associated with equity funds.
• Steady return potential: While they may not provide the high returns of pure equity funds, they offer the potential for relatively stable returns over the medium term.

Equity savings fund vs equity mutual funds

While they’re called equity savings funds, these are categorised as hybrid mutual funds and not equity funds. Hybrid funds are mandated to invest in at least two asset classes – such as debt and equity – whereas equity funds may or may not have a debt component, depending upon the fund manager’s strategy. Here are some popular equity fund categories:

• Large-cap funds: Focus on investing in large, established companies.
• Mid-cap funds: Invest in medium-sized companies with high growth potential.
• Small-cap funds: Target smaller companies with significant growth opportunities but higher risk.
• Multi-cap funds: Invest in large, mid as well as small-cap stocks, with minimum 25% allocation to each.
• Flexi-cap funds: Invest in all three market caps and can flexibly alter the allocation to each.

Here are the key differences between equity savings funds and equity funds on different parameters:

Risk profile

Regular equity funds are typically higher risk as they predominantly invest in stocks. Equity savings funds, on the other hand, seek to complement the equity exposure with debt and arbitrage, thus optimising the balance between risk and return potential.

Volatility

Equity funds can be more volatile due to their exclusive reliance on stocks. Equity savings funds are relatively less volatile, thanks to their diversified portfolio that includes debt and arbitrage allocations.

Who should invest in an equity savings mutual fund?

Equity savings mutual funds can be suitable for you if you seek the following:

• Risk-return potential balance
• Tax efficiency
• Exposure to multiple asset classes
• Relative stability
• Better return potential than debt funds or traditional savings avenues

Equity savings funds: Factors to consider before investing

Here are some key considerations for investors contemplating equity savings funds:

Investment goals

Check if these funds fit your goals and horizon. Equity Savings Funds aim for a moderate return potential with a relatively lower risk, making them suitable for the short or medium term. Investors with a longer horizon seeking higher return potential and comfortable with risk can consider other equity funds.

Risk comfort

Although less volatile than pure equity funds, equity savings funds still involve some stock market exposure. Make sure you’re okay with potential ups and downs in value.

Fund track record

Look at the fund’s past performance across market cycles. Compare it to similar funds and its benchmark.

Costs

Expense ratios affect your earnings. While lower cost is better, also check how the fund has performed overall or assess the fund manager or mutual fund / asset management company’s track record.

How to invest in equity savings mutual funds?

• Research: Study various funds, their asset allocation, and past performance
• Choose a platform: Invest directly through the asset management company or through a registered mutual fund distributor. You can also select an authorised and trusted third-party financial platform or aggregator.
• Complete KYC: Ensure your KYC (Know Your Customer) formalities are up to date
• Select the fund: Pick a fund that matches your investment goals and risk profile. The risk level of equity savings funds can range from low-to-moderate, moderate and moderately high, depending upon the asset management company and portfolio composition.
• Decide the mode: Choose between a lump-sum investment or a Systematic Investment Plan (SIP).
• Monitor performance: Regularly review the fund’s performance to ensure it aligns with your expectations.

Conclusion

Equity Savings Mutual Funds can be a suitable investment option for those seeking a better balance between growth and stability compared to pure equity or debt funds. By combining equity, debt, and arbitrage, these funds cater to investors with moderate risk appetites who want exposure to the equity market without very high volatility. With proper research and a clear understanding of your financial goals, you can integrate these funds into your portfolio to achieve relatively stable growth in the medium term. However, it is advisable to consult a financial advisor before making any investment decisions.

FAQs:

Where do equity savings mutual funds invest?

Equity savings mutual funds invest in a combination of equity shares, debt instruments, and arbitrage opportunities.

How long should you hold your investment in equity savings mutual funds?

These funds are suitable for a short to medium-term horizon, typically 2-5 years. Longer horizon investors may consider other equity-oriented funds for better return potential that can outpace inflation.

What is the minimum amount you should invest in equity savings mutual funds?

The minimum amount required to invest in equity savings funds depends on the fund. Many schemes allow you to begin with as little as Rs. 500 to Rs. 1,000 through a Systematic Investment Plan (SIP) or lumpsum. SIP frequency options can be daily, weekly, monthly, quarterly, etc.

Do equity savings funds have any restrictions in terms of asset allocation?

Yes, these funds must allocate a minimum of 65% to equity and equity-related instruments, and at least 10% in debt securities. They also need to allocate a portion of their portfolio to hedged and unhedged derivative positions.

Are equity savings mutual funds risky?

While they carry some risk due to equity exposure, the presence of debt and arbitrage components mitigates the overall risk, making them relatively less volatile than pure equity funds.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.