All You Ever Wanted to Know About Equity Savings Funds

All You Ever Wanted to Know About Equity Savings Funds

Feb 22, 2018

Equity savings funds are a new addition to the collection of equity mutual funds available for investment. And because it’s a culmination of both equity and debt elements, the risk factor here is lower than pure equities. Still because a considerable portion of the corpus remains parked in equities, the risk amount is not zero. And that is why it’s perfect for investors that are interested in earning high returns on their investments, with exposure to a little risk.

Around a third of the corpus in such funds remains stashed in equity funds, another third remains parked in bank fixed deposits. Whatever is left, remains invested in arbitrage.

For taxation purpose, equity savings funds are treated as equity funds. A lot of financial experts claim that these funds are simply perfect for conservative investors as they will be able to reap double benefits from them in terms of tax. First, the funds offer them amazing tax efficiency. Secondly, they provide impressive post-tax returns.

Hence, investors who are interested in a medium or long-term investment can reap great benefits from these funds, if they don’t mind taking a moderate amount of risk.

The popularity of these funds shot up after the union budget of 2014, when the holing period of debt mutual funds was increased from one year to three years, by the Government of India.

If you are thinking of investing in equity savings funds, then it would be valuable for you to know that there are numerous benefits of making an investment in these funds. The following are the most important ones. Check out -

Tax benefits -

With equity savings funds, you expose yourself to a host of benefits linked to taxation. The first and most important benefit is that any return you earn from these funds are exempted from being taxed. You will, however, be levied a penalty in the form of 15% short-term capital gains tax, if you withdraw your money before the completion of one year of the fund.

With the provision of arbitrage, earning stable returns becomes easier for investors with equity savings funds.

Low volatility -

Since a hefty amount of the corpus remains invested in debt funds and arbitrage, equity savings funds happen to be more stable than other asset classes. This is also the reason why these funds are less risky than pure equities. These funds have lower risks than balanced funds. Why? Because it’s not the majority, but only a third of the total corpus of equity savings funds that remains invested in equities.

A lot of financial experts are of the opinion that these funds are best suited to those investors who are interested in making investments in equity funds, without exposing themselves to market volatility. These funds are also perfect for people who wish to earn good income at medium risk, want tax benefits and wish to capitalize on the capacity of equities to offer capital growth.

Equity Savings Funds are different from balanced funds -

Equity savings funds differ from balanced funds and pure equity funds in a number of ways. They don’t resemble equity funds in terms of risks involved- equity savings funds are less risky than pure equity. But how are they different from balanced funds? While in case of balanced funds, about 65% of the total corpus remains invested in equities, only the remaining stays with debt funds. But in equity savings funds, only a third of the corpus remains parked in equity.

However, one thing that needs to be kept in mind is that equity savings funds are as tax efficient as balanced funds. Investors having a risk appetite that’s moderate and financial goals that need to be fulfilled post three years, can opt for these funds without much thought. Experts say, the investment mode one should opt for while making investments in an equity savings fund is SIP or systematic investment plan.

Below you find the nine top performing equity savings funds available in the market for investment. Have a look -

Source: Swaraj Wealth Research

While DSP BlackRock Equity Savings Fund-Regular Plan - Growth offers a since - launch return of 12.24%, the second top performer HDFC offers 9.87%. For the third i.e. Aditya Birla Sun Life Equity Savings Fund - Regular Plan - growth, the return marked is 9.32%, and for Reliance Equity Savings Fund - Growth Plan - Growth Option the return is 9.07%. L&T Equity Savings Fund offers a return of 9.04%, whereas the sixth best performer, Kotak Equity Savings Fund gives a return of 8.93%. SBI Equity Savings Fund - Regular Plan - Growth takes the seventh slot and offers an overall return of 8.92% since launch. In the eighth and ninth positions are Principal Equity Savings Fund - Growth Option and Edelweiss Equity Savings Advantage Fund - Regular Plan - Growth Option offering 8.28% and 8.27% returns respectively.

Final words –

From the discussion above, we come to know that these funds are best suited to conservative investors with an investment perspective of 1 to 3 years, who don’t generally like the idea of investing in balanced funds. These funds are not good for long term holdings as the hedged portion of the equity will affect returns. If you want your investment to capitalize on equity markets, you should invest in balanced funds, which offer amazing returns over the long run.

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