Equity savings funds are hybrid mutual fund schemes suitable for investors with moderate risk appetites. Risk in these funds is lower than aggressive hybrid funds like balanced funds, at the same time these funds enjoy equity taxation like balanced funds. Long term capital gains (holding period of more than 12 months) in equity savings funds are totally tax free; short term capital gains (holding period of less than 12 months) are taxed at 15%. Dividends paid by equity savings funds are tax free.
The overall exposure to equity in equity savings funds ranges from 65% to 90%. Mutual fund schemes which have more than 65% equity allocation enjoy equity taxation; long term capital gains (investing holding period of more than 1 year) and dividends are tax free. However, a portion of the equity exposure is hedged and this reduces the risk of these funds considerably. The active (un-hedged) equity allocation of equity savings funds ranges between 20 to 30% with the objective of capital appreciation.
40 to 70% of the portfolio of equity savings funds is allocated to completely hedged equity positions with the objective generating arbitrage or risk free profits. 10 to 35% of the portfolio is invested in fixed income and money market instruments with the objective of generating income. Therefore, 70 to 80% of the portfolio has low volatility and generates regular income. Over a sufficiently long investment horizon, the active equity allocation can also generate capital appreciation for investors.
Please see the list of top performing equity savings funds here
Investment Strategy and how does it work
The main advantage of equity savings funds are low volatility and income. Risk and return are directly related; higher the return, higher is the risk. If you are looking for very high returns then equity savings funds are not for you. However, if your primary investment objectives are, low volatility, high liquidity, inflation beating returns (through limited equity exposure) and tax efficiency, then Equity Savings Fund can be a good investment option for you.
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