All You Need to Know About Equity Savings Mutual Funds in 2024
Are you looking to unlock the growth potential of the stock market without diving into the complexities of picking individual stocks? Equity saving mutual funds could be the answer. These funds offer a way to tap into the wealth-building power of equities while benefiting from professional management and diversification. Whether you’re a seasoned investor or just starting, understanding how equity mutual funds work, their types, and their risks can help you make informed decisions that align with your financial goals. Read on to explore all you need to know about equity saving mutual funds and how they can play a crucial role in your investment strategy.
What Are Equity Savings Funds?
Equity savings funds are a type of hybrid mutual fund that seeks to balance risk and return by investing in a mix of equity, debt, and arbitrage opportunities. These funds are designed to expose investors to the stock market while offering the stability of debt instruments. By combining these three elements, equity savings funds aim to deliver moderate returns with relatively lower volatility than pure equity funds.
When you invest in an equity savings fund, a portion of your money is allocated to equities, which are shares of companies. These equities have the potential for high returns but also have higher risk. To counterbalance this, a significant part of the investment is placed in debt instruments like bonds, which are generally considered safer and provide steady income. Additionally, the fund may engage in arbitrage—buying and selling the same security in different markets to take advantage of price differences—which can generate low-risk returns.
Features of Equity Savings Mutual Funds
Equity savings mutual funds come with several key features that make them an attractive option for investors seeking a balanced investment strategy. Here are some of the prominent features:
Balanced Asset Allocation
One of the defining features of equity savings funds is their balanced asset allocation. These funds typically invest around 65% in equities and the remaining in debt and arbitrage. This mix helps capture equities’ growth potential while providing stability through debt and arbitrage.
Reduced Volatility
Due to their diversified investment strategy, equity savings funds often exhibit lower volatility than pure equity funds. The debt component helps cushion against market downturns, making these funds suitable for conservative investors seeking equity exposure without excessive risk.
Tax Efficiency
Equity savings funds are usually classified as equity funds for tax purposes, provided they maintain at least 65% allocation to equities. This means long-term capital gains (on holdings over one year) are taxed at a lower rate of 12.50% beyond ₹1 lakh, while short-term gains are taxed at 20%.
Arbitrage Advantage
The arbitrage component of equity savings funds involves taking advantage of price differences between markets or instruments. This strategy is generally low-risk and can generate steady returns, adding to the fund’s overall performance.
Regular Income Potential
The debt portion of equity savings funds often includes high-quality bonds that provide regular interest income. This feature makes these funds appealing to investors looking for periodic income and the potential for capital appreciation from the equity portion.
Flexibility in Investment
Investors can choose to invest in equity savings funds through various methods, including lump-sum investments, Systematic Investment Plans (SIPs), or online platforms. This flexibility allows investors to tailor their investment strategy according to their financial goals and risk tolerance.
Professional Management
Equity savings funds are managed by professional fund managers who actively adjust the portfolio based on market conditions. They strive to balance risk and return by strategically allocating assets across equities, debt, and arbitrage.
Equity Savings Fund Vs Equity Funds
When comparing equity savings funds and equity funds, it’s essential to understand the differences in their risk profiles, investment strategies, and potential returns. Equity Savings Funds invest in a mix of equities, debt, and arbitrage opportunities, which helps balance risk and provide more stable returns. This diversified approach makes them less volatile and better suited for conservative investors seeking moderate growth with lower risk exposure.
In contrast, Equity Funds primarily invest in stocks, making them more volatile and suitable for investors with a higher risk tolerance who seek higher returns. While Equity Funds have the potential for significant growth, they are more vulnerable to market fluctuations. Therefore, choosing between these options should align with your financial goals, risk appetite, and investment horizon. Here’s a quick summary of the differences between equity saving funds and equity mutual funds.
| Feature | Equity Savings Fund | Equity Fund |
| Risk Profile | Lower risk due to a diversified portfolio | Higher risk due to full equity exposure |
| Investment Strategy | A mix of equities, debt, and arbitrage | Primarily invests in equities |
| Volatility | Lower volatility | Higher volatility |
| Suitable For | Conservative investors seeking moderate growth | Aggressive investors seeking higher returns |
Types of Equity Mutual Funds
Equity mutual funds are diverse, offering various types that cater to different investor needs and strategies. These funds can be categorised based on several factors, including market capitalisation, investment strategy, and tax benefits. Here’s a detailed look at the various types of equity mutual funds:
I. Based on Market Capitalisation
1. Large-Cap Equity Mutual Funds
Large-cap funds invest in the top 100 companies by market capitalisation. Large-cap companies are well-established and have a history of stable performance, making these funds less volatile and suitable for conservative investors.
2. Mid-Cap Equity Mutual Funds
Mid-cap funds invest in companies ranked between 101 and 250 in market capitalisation. These companies are typically in a growth phase, offering higher potential returns than large-cap stocks but with more risk.
3. Small-Cap Equity Mutual Funds
Small-cap funds focus on companies ranked below the top 250 by market capitalisation. These funds are highly volatile but can offer significant returns, making them ideal for aggressive investors looking for long-term growth.
4. Large- and Mid-Cap Equity Mutual Funds
These funds combine investments in large-cap and mid-cap stocks, offering a blend of stability and growth. This balanced approach helps reduce risk while capturing the growth potential of mid-cap companies.
5. Multi-Cap Equity Mutual Funds
Multi-cap funds invest in large, mid-cap, and small companies, providing diversified exposure to different market segments. This diversification helps balance risk and optimise returns.
II. Based on Investment Strategy
1. Thematic or Sectoral Funds
These funds focus on a specific sector (e.g., IT, pharmaceuticals) or investment theme (e.g., international stocks, emerging markets). While they offer the potential for high returns if the sector or theme performs well, they are also riskier due to their concentrated exposure.
2. Focused Equity Funds
Focused equity funds invest in a concentrated portfolio, typically up to 30 stocks, focusing on companies with specific market capitalisations. Investing in the best-performing stocks and potentially achieving higher returns is the idea.
3. Contra Equity Funds
Contra funds follow a contrarian investment strategy. The fund manager invests in underperforming or undervalued stocks with the expectation that they will recover in the long term. This strategy is based on the belief that markets often overreact to short-term events, providing opportunities for gains.
4. Active Funds
Active equity funds are managed by professional fund managers who actively select and manage the portfolio to outperform a specific benchmark. The manager’s expertise plays a crucial role in the performance of these funds.
5. Passive Funds
Passive equity funds, including index funds, track a specific market index or segment. These funds are designed to replicate the performance of the chosen index with minimal intervention from the fund manager. They are usually lower in cost compared to active funds.
III. Based on Tax Benefits
1. Equity-Linked Savings Scheme (ELSS)
ELSS is a tax-saving equity mutual fund that offers deductions under Section 80C of the Income Tax Act, up to ₹1.5 lakh per financial year. ELSS funds invest primarily in equities and have a mandatory lock-in period of three years, providing both tax benefits and growth potential.
2. Non-Tax Saving Equity Funds
Other equity funds that do not offer tax benefits under Section 80C fall into this category. These funds are subject to capital gains tax based on the holding period and the gains realised. Investors choose these funds based on their specific financial goals without the focus on tax-saving benefits.
How Does Equity Saving Mutual Funds Work?
Equity savings funds are a type of hybrid mutual fund that seeks to balance risk and reward by investing in a mix of equity, debt, and arbitrage opportunities. The primary goal of these funds is to provide moderate returns with lower volatility compared to pure equity funds. Here’s how they typically work:
1. Asset Allocation
Equity savings funds allocate their investments across three main asset classes: equities, debt instruments, and arbitrage positions. Generally, a significant portion (around 65%) is invested in equities, which allows the fund to benefit from the stock market’s long-term growth potential. The equity portion might include large-cap, mid-cap, and small-cap stocks, depending on the fund’s strategy.
2. Debt Component
A substantial part of the fund is also invested in debt instruments like government securities, corporate bonds, and other fixed-income securities. This debt component provides stability to the fund by generating regular income and reducing overall volatility. The debt portion acts as a cushion during market downturns, protecting the fund from significant losses.
3. Arbitrage Strategy
Arbitrage is a key feature of equity savings funds. This strategy involves simultaneously buying and selling the same or related securities in different markets to exploit price differences. For example, a fund might buy a stock in the cash market and sell it in the futures market. These trades are typically low-risk and help generate additional returns without increasing the portfolio’s overall risk.
4. Tax Efficiency
One of the advantages of equity savings funds is their tax efficiency. Since these funds maintain a minimum of 65% allocation to equities, they are treated as equity funds for tax purposes. This means that long-term capital gains (after one year) are taxed at a lower rate of 12.50% beyond ₹1 lakh, while short-term capital gains are taxed at 20%.
5. Risk Management
By diversifying across equities, debt, and arbitrage, equity savings funds aim to reduce the overall risk. The equity portion offers growth potential, the debt portion provides stability, and the arbitrage component generates low-risk returns. This combination makes equity savings funds less volatile than pure equity funds, making them suitable for conservative investors looking for a balance between risk and return.
6. Return Potential
The returns from equity savings funds come from three sources: capital appreciation from equities, interest income from debt instruments, and gains from arbitrage opportunities. While the returns may not be as high as those from pure equity funds, they are typically more stable and less prone to sharp declines during market corrections.
How to Invest in Equity Savings Mutual Funds?
Investing in equity savings mutual funds can be a strategic way to balance risk and return. Here are some of the ways you might consider to invest in these funds:
1. Direct Investment Through the Fund House
One of the most straightforward methods to invest in equity savings mutual funds is by investing directly with the Asset Management Company (AMC) that manages the fund. For example, if you are considering the HDFC Equity Savings Fund, you can visit the HDFC AMC website or their office to complete the necessary documentation and start your investment directly. This approach could save you from paying additional commissions or fees to intermediaries.
2. Online Investment Platforms
Several online investment platforms provide access to a variety of mutual funds, such as Tickertape. It offers over 50+ filters and a feature to build a custom filter. These features allow you to get your list of the best equity savings mutual funds based on your preferred criteria and compare various funds in one go.
3. Banks and Financial Institutions:
Many banks and financial institutions offer mutual fund investment services. You can walk into a branch, discuss your financial goals with a relationship manager, and invest in mutual funds. This method provides the convenience of investing while receiving personalised advice from bank representatives.
4. Through Registered Investment Advisors (RIAs):
Registered Investment Advisors can help you navigate through the various equity savings schemes available in the market. They assess your financial situation, risk appetite, and long-term goals to recommend the most suitable funds. An RIA can also assist in creating a customised investment strategy that includes equity savings mutual funds.
5. Via Demat and Trading Accounts
If you already have a demat account for trading stocks, you can invest in equity savings mutual funds through the same platform. Many stockbrokers offer this facility, allowing you to manage both your stock and mutual fund investments in one place. This option might be particularly convenient if you are already familiar with the trading platform and want to diversify your portfolio with funds. You can start by opening a Demat account with smallcase!
6. Systematic Investment Plans (SIPs)
A Systematic Investment Plan (SIP) is a popular method to invest in mutual funds, including equity savings funds. With SIPs, you can invest a fixed amount regularly, such as monthly, into your chosen fund. This method promotes disciplined investing and reduces the risk of timing the market. You can set up an SIP through any of the abovementioned channels, such as directly with the fund house, through an online platform, or via your bank.
Why Should You Invest in an Equity Saving Mutual Fund?
Equity savings funds offer a distinctive approach to balancing growth potential with risk management. Here’s a detailed breakdown of why these funds might be a suitable investment choice:
1. Balanced Risk and Reward
Equity savings funds aim to deliver moderate returns by allocating assets across equities, debt instruments, and arbitrage strategies. This diversified approach helps to cushion the portfolio against market volatility, offering a more stable investment compared to pure equity funds. The equity portion seeks growth, while the debt component provides income and stability, and the arbitrage segment takes advantage of price discrepancies for additional gains.
2. Tax Efficiency
Equity savings funds are typically classified as equity-oriented for tax purposes, provided they maintain at least 65% of their investments in equities. This classification makes them eligible for favourable tax treatment, where long-term capital gains (on holdings over one year) are taxed at a lower rate of 12.50% beyond ₹1 lakh, while short-term gains are taxed at 20%. This tax efficiency can be particularly beneficial for investors looking to optimise their post-tax returns compared to other investment options like debt funds.
3. Regular Income Potential
The debt component of equity savings funds often includes high-quality bonds that generate regular interest income. This feature, combined with potential capital appreciation from the equity portion, makes these funds appealing to investors seeking a blend of growth and income. The regular income provided by the debt instruments can help offset the volatility of the equity portion, offering a balanced return profile.
4. Suitable for Conservative Investors
These funds are ideal for conservative investors who desire some exposure to the stock market but want to avoid the higher risks associated with pure equity investments. The inclusion of debt and arbitrage strategies in equity savings funds helps mitigate risk, making them a safer alternative for those who are cautious about market volatility.
5. Diversification
Equity savings funds diversify across asset classes—equities, debt, and arbitrage. This diversification reduces the reliance on any single asset class for returns, thereby lowering the portfolio’s overall risk. By spreading investments across various segments of the market, these funds aim to achieve more consistent performance over time.
6. Accessibility and Low Entry Threshold
These funds often have a low minimum investment requirement, making them accessible to a broad range of investors. Whether you’re a seasoned investor or just starting, equity savings funds allow you to begin with a modest amount and gradually increase your investment as your financial goals evolve.
Factors to Consider While Investing in Equity Savings Funds
When considering an investment in equity savings funds, it’s important to evaluate key factors to ensure alignment with your financial goals and risk tolerance:
- Investment Objective: You should first assess whether your long-term goals align with the objectives of an equity savings fund. These funds are typically designed for moderate returns with reduced risk, making them suitable for those seeking capital preservation with some growth. However, other equity funds might be more suitable if you aim for high growth and can handle more risk.
- Risk Tolerance: While equity savings funds are generally less volatile than pure equity funds, they still involve stock market exposure. You need to gauge your own risk tolerance to ensure you’re comfortable with the potential fluctuations in the fund’s value.
- Fund Performance: Reviewing a fund’s historical performance is crucial. You should compare the fund’s returns over different periods to those of its benchmark and peer funds. Pay attention to how it has performed in various market conditions, especially during downturns.
- Expense Ratio: The expense ratio directly affects your net returns. You should compare the expense ratios of different equity savings funds. While a lower ratio is preferable, it’s essential to consider it in relation to the fund’s overall performance.
- Tax Implications: Since equity savings funds are treated as equity for tax purposes, understanding the tax implications is important. If held for over a year, these funds may benefit from lower long-term capital gains tax rates, whereas shorter holdings could incur higher short-term tax rates.
Taxability of Equity Savings Funds as per the Budget 2024
Understanding the latest tax regulations on equity mutual funds is essential for making informed investment decisions. The Union Budget 2024 has introduced significant changes to the taxation of equity mutual funds, simplifying the tax structure while altering rates and benefits. Here is a detailed breakdown of the new tax rules:
Short-Term Capital Gains (STCG)
If you hold equity mutual funds for less than a year, the gains from these investments are classified as short-term capital gains. According to the new budget, these gains are now taxed at a rate of 20%, which has been increased from the previous rate of 15%.
Long-Term Capital Gains (LTCG)
For equity mutual funds held for more than a year, the gains are considered long-term capital gains. The key points to note under the new budget are:
- Tax-Free Limit: Gains up to Rs. 1.25 lakh in a financial year remain tax-free. This limit has been increased from the previous threshold of Rs. 1 lakh.
- Tax Rate: Any gains above Rs. 1.25 lakh are taxed at a flat rate of 12.5%. It was previously taxed at 10%.
- Indexation: It’s important to note that the benefit of indexation, which previously allowed investors to adjust the purchase price of their assets for inflation, has been removed for all asset classes, including equity saving mutual funds.
Indexation is a method used to adjust the purchase price of an asset (like property or gold) for inflation over the years. This adjusted price is then used to calculate capital gains. Previously, long-term capital gains from selling property, gold, or other unlisted assets were taxed at 20%, but you could use indexation to reduce your taxable profit. The new rule simplifies the tax structure by setting a flat 12.5% tax rate for all long-term capital gains. However, it removes the indexation benefit.
Summary
| Capital Gains Tax | Holding Period | Old Rate | New Rate |
| Short-Term Capital Gains (STCG) | Less than 12 months | 15% | 20% |
| Long-Term Capital Gains (LTCG) | More than 12 months | 10% | 12.50% |
- No Indexation Benefit: This change affects the overall tax liability, potentially increasing it for long-term investors.
Advantages of Equity Saving Mutual Funds
Equity savings funds offer a unique blend of benefits that make them an attractive investment option for a wide range of investors. Here are some of the key advantages:
1. Balanced Risk-Return Profile: One of the most significant advantages of equity savings funds is their ability to balance risk and return. By investing in a mix of equities, debt instruments, and arbitrage opportunities, these funds aim to provide moderate returns with reduced volatility compared to pure equity funds.
2. Tax Efficiency: Equity savings funds are treated as equity-oriented funds for tax purposes, provided they maintain at least 65% allocation to equities. This classification allows investors to benefit from favourable tax treatment.
3. Diversification: These funds offer diversification across multiple asset classes—equities, debt, and arbitrage—which helps to spread risk and reduce the impact of market fluctuations. Diversification is a key strategy in investing, as it can help protect your portfolio from volatility in any single asset class.
4. Lower Volatility: Compared to pure equity funds, equity savings funds typically exhibit lower volatility due to their diversified portfolio. The debt and arbitrage components act as a buffer against the fluctuations in the equity market, making these funds a safer option for conservative investors.
5. Flexibility in Investment: Equity savings funds are flexible in terms of investment methods. Depending on their financial goals and risk tolerance, investors can choose to invest in a lump sum, systematic investment plans (SIPs), or various online platforms.
Risk Involved with Equity Saving Mutual Funds
While equity savings funds offer several benefits, it’s crucial to understand the risks involved:
- Equity Market Risk: These funds remain exposed to the stock market despite diversification. If the market performs poorly, the fund’s value may decline due to the volatility of the equity portion.
- Interest Rate Risk: These funds’ debt portion is subject to interest rate risk. Rising rates can reduce the value of existing bonds in the portfolio, potentially lowering the fund’s net asset value (NAV).
- Arbitrage Risk: Arbitrage strategies depend on market conditions, which may not always be favourable. If opportunities for profitable arbitrage are limited, this component may not deliver expected returns, affecting the fund’s overall performance.
- Credit Risk: The debt instruments within the fund carry credit risk, meaning there’s a chance that issuers could default on payments. Although managers typically invest in high-quality debt, downgrades or defaults can still impact returns.
- Liquidity Risk: Liquidity risk arises when it’s difficult to sell assets at favourable prices, especially during market stress. This could lead to challenges in managing the fund’s cash flows and meeting redemptions.
- Fund Manager’s Skill: The success of an equity savings fund largely depends on the fund manager’s expertise in balancing equities, debt, and arbitrage. Poor management decisions can adversely affect the fund’s performance, highlighting the importance of choosing funds managed by experienced professionals.
Who Should Invest in Equity Savings Mutual Funds?
Equity savings mutual funds are designed to cater to a specific group of investors who are looking for a balanced approach to investing. Here’s a closer look at who might benefit most from these funds:
1. Conservative Investors Seeking Equity Exposure
If you are a conservative investor who wants to participate in the equity markets but is wary of the volatility associated with pure equity funds, equity savings funds could be a suitable choice. These funds invest a portion of their assets in equities to capture growth potential while balancing this with debt instruments and arbitrage strategies to reduce overall risk.
2. Investors Looking for Tax-Efficient Returns
Equity savings funds offer tax benefits similar to equity-oriented funds because they maintain a significant portion of their portfolio in equities (at least 65%). This classification allows long-term capital gains (after holding for one year) to be taxed at a lower rate of 12.50% beyond ₹1 lakh and short-term gains at 20%. These funds could be attractive if you are in a higher tax bracket and looking for tax-efficient investment options.
3. Individuals Seeking Regular Income with Growth Potential
These funds often appeal to investors who need regular income but also want to participate in market growth. The debt component of the fund provides a steady income stream through interest payments, while the equity and arbitrage portions offer the potential for capital appreciation.
4. First-Time Equity Investors
Equity savings funds can be a good entry point for first-time equity investors who still need to become comfortable with the risks associated with pure equity investments. The diversified nature of these funds, which includes safer debt instruments and low-risk arbitrage opportunities, makes them a less intimidating option for new investors.
5. Retirees or Near-Retirees
The need for income and capital preservation becomes critical for retirees or those nearing retirement. Equity savings funds, with their blend of income-generating debt securities and growth-oriented equities, offer a balanced solution. They provide the potential for steady income while still offering some exposure to equities for long-term growth.
6. Investors with a Moderate Risk Tolerance
Equity savings funds might be suitable if you have a moderate risk tolerance and are looking for an investment that balances growth and safety. The fund’s allocation across different asset classes helps manage risk, making it an option for those who are neither highly conservative nor aggressive in their investment approach.
7. Investors with a Medium-Term Investment Horizon
Equity savings funds are generally suitable for those with a medium-term investment horizon, typically three to five years. If your financial goals align with this timeframe, and you are looking for a mix of safety and growth, these funds might fit well within your portfolio.
To Wrap Up…
Equity saving mutual funds offer a versatile investment option that caters to a wide range of financial goals and risk appetites. By combining the growth potential of equities with the safety net of diversification and professional management, these funds provide a balanced approach to wealth creation. Whether you aim to build long-term wealth, save for retirement, or simply grow your capital, equity saving mutual funds can be a valuable addition to your portfolio. With a solid understanding of how these funds operate, you can confidently navigate the investment landscape and make choices that support your financial aspirations.
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FAQs About Equity Savings Fund
Equity savings mutual funds invest in a mix of equities, debt instruments, and arbitrage opportunities. Typically, around 65% of the portfolio is allocated to equities for growth potential. At the same time, the rest is invested in debt for stability and arbitrage to capitalise on price differences in the market.
It is general practice to hold your investment in equity savings funds for at least three to five years. This duration allows you to benefit from the equity portion’s growth potential while mitigating the impact of short-term market volatility. However, consult a professional before making any investment decisions.
The minimum investment amount for equity savings funds can vary, but many funds allow you to start with as little as ₹500 to ₹1,000 through a Systematic Investment Plan (SIP). Lump-sum investments may require a higher minimum amount.
Yes, equity savings funds must maintain a minimum 65% allocation to equities to qualify for equity taxation benefits. The remaining portion is typically invested in debt and arbitrage strategies, providing a balanced risk-return profile.
Equity savings funds are somewhat risky due to their exposure to both equities and debt, but they generally carry less risk than pure equity funds.
