Equity Savings Mutual Funds
Equity savings funds are open-ended mutual fund schemes that fall under the Hybrid category introduced by the SEBI. These funds generate returns by investing in equity, debt, derivatives, and arbitrage. It is a relatively newer financial instrument in the Indian market and is considered safer than pure equity funds and more tax-efficient than pure debt funds.
The investment pattern these funds use sets them apart from traditional schemes. With equity savings schemes, about 30-35% of the assets are invested in equity while the remaining is put in debt funds and arbitrages. As they are a mix of segments, they help maximize returns while maintaining an efficient risk-reward ratio.
Diversification of investments helps neutralize market volatility to an extent. These funds are an excellent option for investors who generate high returns with minimum risk. They are also perfect for individuals seeking capital generation to meet their short-term goals.
Who Should Invest in Equity Savings Mutual Funds?
Equity savings are low-risk mutual fund schemes that offer good returns over the short to medium term. Moreover, some of these even provide investors dividend incomes regularly. Let us see what type of investors should consider these funds.
- The ESS scheme has always remained popular among investors who look for low-risk equity funds. Equity savings funds are a more secure investment option with returns similar to equity schemes.
- Investors with a short investment horizon looking for great returns to grow their capital should choose these funds. As they are low-risk, they also suit conservative investors in search of an alternative to conservative saving methods.
- If you want to invest for less than two years for your investment, this type of fund can help you fulfill your investment goals. However, the ideal investment horizon is over one year to realize gains from these funds. It should also be noted that these funds are not an ideal substitute for equity funds as the latter gives better returns over the long term.
Features of Equity Savings Mutual Funds
Here are the key features of equity savings funds.
- Asset allocation – As per the SEBI regulations, an equity savings fund can use hedging strategies to invest in equity and debt securities and arbitrage opportunities. A minimum of 65% of the assets goes to equity, while 10% or more can be allocated to debt securities.
- Risk-reward ratio – As these funds invest in equity and debt, they involve a lower risk than pure equity funds. However, the performance of underlying instruments influences the funds’ NAV which means returns can fluctuate with market movements. They are known to deliver consistent returns over the short term.
Factors to consider while investing in Equity Savings Funds
Here is a list of factors you can consider before investing in equity savings funds
Credit quality
It is essential to look at this indicator for the fund to get an idea of the default risk for its debt part. The scheme should not invest in many low-rated instruments or unrated debt securities. You must see that the fund you pick has a good credit quality.
Diversification
An equity savings fund should provide good diversification to investors. A concentrated portfolio has a risk of reacting to market movements. A diversified portfolio with top holdings under 50% would ensure the risk is spread across the investments.
Expense ratio
A higher expense ratio can lower the returns from the investment, so it is a good idea to pick funds with moderate or low turnover ratios.
Performance and risk analysis
To gauge the fund’s performance in varying market cycles, you must analyze the risk factors. You can use specific indicators to calculate the potential returns and risks and choose accordingly.
Taxability of Equity Savings Funds
When taxing the returns, equity savings funds are treated much like any other equity or hybrid scheme. This means investors are liable for some taxes depending on their investment horizon.
Long-term capital gains from these funds are tax-free if you make less than INR 1 lakh in a year. Any additional gain is taxed at a rate of 10%. However, short-term gains made from funds held for less than a year are taxed at 15%.
Risk Involved With Equity Savings Funds
- Equity savings funds are not as safe as debt-focused funds but are comparatively safer than equity schemes.
- These mutual funds use a hedged strategy for up to 60-75 percent of the portfolio. The unhedged equity exposure is about 15-25 percent, while the rest is held in debt securities. As they are equity-focused, these funds are quite a tax efficient.
- Equity savings funds don’t pose high risks because of the arbitrage portion. It is an excellent way of investing in mutual funds if you can hold it for a minimum of 3-4 years and you are a risk-averse investor looking for a tax-efficient way to optimize your returns. You can also invest in lumpsum because this is where only a tiny part of your money gets exposed to equity.
Advantages of Equity Savings Funds
Equity savings funds expose debt and equity securities, allowing you to diversify your investments and spread the risk across multiple asset classes.
Moreover, as these funds consider leveraging the arbitrage opportunities, fund managers can easily adjust the strategies based on market emotions, thereby managing the risks efficiently.
Here are some of the impressive benefits of investing in equity savings funds.
- Low volatility – As more than 50% of these funds are divided between debt instruments and arbitrage holdings, you can expect more stable returns than equity investments. Fund managers prefer using different derivatives strategies to minimize volatility. The arbitrage portion of the fund further capitalizes on the inconsistency in prices across different market segments.
- Arbitrage benefit – The biggest advantage of these funds is the arbitrage portion in terms of stable returns. Most fund houses know how to handle arbitrage to facilitate low-risk returns. Equity savings funds are, therefore, an ideal option for those who want stable gains from their investment.
- Tax savings – As these funds are treated like equity schemes for taxation, the liability reduces considerably. On holding the funds for more than a year, investors can benefit from tax exemption for returns less than INR 1 lakh.
- Diversification – The best equity savings funds offer investors a diversified portfolio through one channel. This means you don’t need to analyze the performances of various funds and choose the one that best suits your requirements. You can invest in one mutual fund of this category, and the fund managers take care of the rest.
Best Equity Savings Mutual Funds
Let us talk about some of the best equity savings funds worth considering in 2022.
SBI Equity Savings Fund
This equity savings fund from SBI Mutual Fund has existed since 2015. It currently has assets under management worth 2443 crores INR. The scheme provides capital growth through exposure to equity and income investment in arbitrage opportunities. It uses the benchmark NIFTY Equity Savings TRI and has an expense ratio of 0.64%, which is similar to most other funds in the category.
Minimum Investment:
- INR 1000 for lumpsum
- INR 500 for SIP
Fund Performance: SBI Equity Savings Fund has delivered an average of 9.47% annual returns since its inception. The returns of last year are 4.67%.
HDFC Equity Savings Fund
A mutual fund scheme from HDFC Mutual Fund, this equity savings plan was introduced about nine years back and currently, has an AUM of 2611 crores INR. The scheme aims to boost capital growth through investments focused on equity and related securities, debt instruments, and arbitrage opportunities. The fund’s expense ratio is 1.2%, which is somewhat higher than what other funds charge. It uses the Nifty Equity Savings TRI benchmark.
Minimum Investment:
- INR 100 for lumpsum
- INR 100 for SIP
Fund Performance: HDFC Equity Savings Fund has delivered an average of 10.29% annual returns since its inception. The 1-year returns are 6.16%, and the fund doubles the invested money in seven years.
ICICI Prudential Equity Savings Fund
The equity savings fund from ICICI Prudential Mutual Fund was introduced in 2014 and currently holds a total of 5146 crores INR worth of assets under management. The scheme aims to generate consistent income by investing in fixed-income instruments and using arbitrage and other strategies. It also generates long-term capital growth by allocating a small portion of assets to equity. The expense ratio of the scheme is 0.44% which is comparatively lesser than most other funds of the type.
Minimum Investment:
- INR 5000 for lumpsum
- INR 100 for SIP
Fund Performance: The fund has delivered an average of 8.34% annual returns since its inception. The returns for the last year are 6.27%.
Mirae Asset Equity Savings Fund
This hybrid fund in the equity savings category was launched in 2018. It currently has an AUM of INR 583 crores and an expense ratio of 1.41%. The scheme aims to generate income and capital growth through investments in equity securities, arbitrage opportunities, and debt instruments. This fund is ideal for those interested in benefitting from diversification.
Minimum Investment:
- INR 5000 for lumpsum
- INR 1000 for SIP
Fund Performance: The fund has delivered an average of 11.5% annual returns since its inception. The returns for the last year are 3.9%.
Kotak Equity Savings Fund
A high-performance equity savings scheme from Kotak Mahindra Mutual Fund, this fund was started in 2014 and currently has INR 1972 crores worth of assets under management. It is a medium-sized fund with an expense ratio of 1.09%, somewhat higher than most other funds charge. It has 34.23% of assets allocated to equity and 19.2% to debt securities.
Minimum Investment:
- INR 5000 for lumpsum
- INR 1000 for SIP
Fund Performance: The fund has delivered an average of 9.44% annual returns since its inception. Its 1-year returns for the last year are 8.38%.
Aditya Birla Sun Life Equity Savings Fund
This scheme has been around for over seven years, an equity savings fund from Aditya Birla Sun Life Mutual Fund. Currently, it manages assets worth INR 519 crores and offers an expense ratio of 1.34%. This scheme allocates 49% of assets to equity and 21% to debt securities. The equity portion is primarily invested in Energy, Financial, Automobile, and Construction sectors.
Minimum Investment:
- INR 1000 for lumpsum
- INR 1000 for SIP
Fund Performance: The fund has delivered an average of 8.51% annual returns since its launch. The returns for the last year are -0.37%, while the 3-year returns are 10.65%.
Axis Equity Saver Fund
Introduced in 2015, this equity savings mutual fund from Axis Mutual Fund aims to deliver income distribution and capital appreciation with the help of investments in equity, debt, money market instruments, and arbitrage opportunities. The fund currently has an AUM of 1216 crore INR and an expense ratio of 0.87%. The scheme allocates 42.15% of assets to equity and 33.48% to debt. The equity portion primarily focuses on the Automobile, Technology, Financial, Energy, and Materials sectors.
Minimum Investment:
- INR 5000 for lumpsum
- INR 1000 for SIP
Fund Performance: The fund has delivered an average of 9.10% annual returns since its inception. The returns for the last year are 1.64%.
Tata Equity Savings Fund
This equity savings fund from Tata Mutual Fund aims to generate capital appreciation through a portfolio focusing on equity and debt instruments. The scheme was started in 2013 and currently has assets under management worth 154 crores INR. Its expense ratio is 0.12%, less than the standard for these funds. It currently allocates 30.5% of assets to equity and 29% to debt instruments.
Minimum Investment:
- INR 5000 for lumpsum
- INR 500 for SIP
Fund Performance: The fund has delivered an average of 8.16% annual returns since its inception. The 1-year returns are 4.01%. The fund doubles the invested money every nine years.
L&T Equity Savings Fund
The L&T Equity Savings Fund was started more than nine years back as a part of the L&T Mutual Fund. It currently has INR 192 crores worth of assets under management. Its expense ratio is 0.69%, similar to most other funds in the category. It allocates 25% of assets to equity and about 30% to debt instruments. The equity part of the fund primarily goes into sectors like automobiles, consumer staples, services, financials, and materials.
Minimum Investment:
- INR 5000 for lumpsum
- INR 500 for SIP
Fund Performance: The fund has delivered an average of 8.92% annual returns since its inception. The 1-year returns are 4.07%. The fund doubles the invested money every nine years.
IDFC Equity Savings Fund
This equity savings mutual fund was introduced back in 2013 and has been performing well since then, helping investors generate capital growth by investing in equity and debt instruments. The current AUM of the fund is INR 108 crores, while the expense ratio is 0.33% which is relatively less than what other funds charge. The equity portion of this fund is primarily invested in the Automobile, Financial, Energy, Healthcare, and Technology sectors.
Minimum Investment:
- INR 5000 for lumpsum
- INR 100 for SIP
Fund Performance: The fund has delivered an average of 7.42% annual returns since its inception. The returns for the past year are 3.45%.
Frequently Asked Questions
Investing in equity savings funds is relatively easy with 5Paisa. You can simply register online on the website or app of any online trading service and select the mutual fund you want to invest in. Next, you can select between lumpsum or SIP and complete your payment.
As these funds invest in a mix of debt, equity, and arbitrage instruments, they are suitable for the medium to long term. One should consider investing them for at least one year and longer to see profits.
Equity savings funds invest money into three areas. The first is the equities that focus on portfolio diversification. The other part is invested in debt, which does not have a lot of credit or interest rate risk. The third part is arbitrage, where the objective is to generate returns by leveraging the mispricing opportunities in different markets.
Equity savings funds come from many fund houses, and the minimum investment amount varies according to the parent company and the fund. In general, the minimum amount for lumpsum investment is about INR 1000, while the minimum amount for SIP starts anywhere from INR 100. There is no upper limit for the amount you can invest in these mutual funds.
Investing in equity savings provides a dual advantage of income distribution and capital generation through a diversified portfolio. The fund actively uses hedged and unhedged strategies to manage risk and increase returns. This approach also helps deal with volatility and uncertainty in the stock market.
As mandated by the SEBI, equity savings schemes should invest a minimum of 65% of the total assets in equity, including the arbitrage positions, while at least 10% should go into debt instruments. According to the regulations, a fund in this category can invest in equity and related securities, debt instruments, and arbitrage opportunities using hedging strategies.