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Overview of Equity Savings Funds

One of my readers asked me about “Equity Savings Funds” which will help him in his investments. Let’s learn more about them.

What are Equity Saving Funds?

Equity Savings Funds invest a third in equity, a third in arbitrage and a third in fixed income instruments.

These funds are for a conservative investor as the risk profile is very low because of the debt and arbitrage components being a part of the fund and also the equity component being capped at 33%.

To reduce volatility and hedge the portfolio, these funds actively use derivative strategies.

The equity and the derivative exposure combined ~65% is considered as ‘equity’ allocation and hence, these categories of funds are treated as equity funds.

Hence, they have the same tax profile as that of a pure equity fund and become tax-free after 1 year.

To retain equity taxation, funds will restrict the fixed income (debt) exposure to 35 percent.

Who should invest in them?

It is important to know that these funds cannot build long-term wealth.

What these funds offer are stability and tax efficiency.

These funds are suitable for those looking for some equity exposure but do not have a very long time frame. They suit those with limited risk appetite and looking for less uncertainty in returns.

They are fit for those with a 2-3 year time frame who want tax benefits that are not available in debt-oriented funds for such a short time period.

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Equity Saving Funds Performance:

Given that many of the funds in this category are of recent origin, they do not have much of a track record.

As you can see, only 1 fund above has been rated by Value Research. And only a few of the funds have a track record to look at and make a decision.

Planning to Invest:

If you are planning to invest in this funds, please decide that based on some parameters as indicated below –

  1. Look for high AUM – This will show investor’s confidence in the fund.
  2. Consistent Performance – Look for funds who are delivering returns consistently over a period of time.
  3. Don’t go by 1 yr returns – You are seeing such high returns in the last 1 year due to the market being at an all-time high and the funds having 33% pure equity exposure.

So, this is an overview of Equity Savings Funds and one can think about investing in them especially a risk-averse investor expecting about an average of ~8-9% returns from them with the income being tax-free after a year.

So, friends what do you think about these funds? Are you planning to invest in them? Let us know by commenting below…

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