What are Equity Savings Scheme Funds?

Introduction

An investment that combines the high returns of stocks, the stability of bonds, and the strategic advantages of market opportunities might sound too good to be true. However, that's precisely what equity savings funds offer.

Navigating the complex world of investments can seem daunting, but equity savings schemes present a balanced approach that simplifies your journey. In this blog, we'll explore how these funds work, their benefits, and why they might be the right choice for your investment portfolio.

What are Equity Savings Funds?

Equity savings funds are a type of open-ended mutual fund scheme that allocates investments across equity, debt, and arbitrage opportunities (a strategy of buying and selling assets in different markets).

The Securities and Exchange Board of India (SEBI) introduced these funds in 2017 and mandates at least 65% of the investments in these funds must be in equity and equity-related instruments, and at least 10% must be in debt instruments.

Features of an Equity Savings Fund

Equity savings funds combine equities, debt, and arbitrage opportunities to offer balanced returns with moderate risk. Key features include:

1. Diversified Investment: Equity savings funds invest in a mix of equity, debt, and arbitrage opportunities. This diversification helps manage risk and provides stable returns.
2. Regular Income: The debt portion of the fund provides regular income through interest payments, making it an attractive option for conservative investors.
3. Professional Management: Managed by experienced fund managers, equity savings schemes offer the advantage of professional management and expertise in selecting and balancing the right mix of assets.
4. Risk Reward Ratio: These funds invest in both stocks and debt, making them less risky than pure equity funds. While their returns may change with market fluctuations due to the performance of the underlying instruments, they are known to provide consistent long-term returns.
5. Automatic Rebalancing: Fund managers regularly rebalance the portfolio to maintain the desired allocation between equity, debt, and arbitrage. This automatic rebalancing helps manage risk and ensure the fund stays aligned with its investment objectives.

Also Read: What Are Equity Mutual Funds

Factors to Consider Before Investing in Equity Savings Schemes

Consider the following factors before investing in equity savings schemes:

1. Investment Horizon: Equity savings funds are suitable for investors with a medium to long-term investment horizon, typically 3 to 5 years or more.
2. Risk Appetite: These funds are less volatile than pure equity funds but still carry market risk. Understand your risk tolerance before investing.
3. Expense Ratio: Check the fund's expense ratio, as it impacts the net returns. Lower expense ratios are generally better. The expense ratio is the annual fee a mutual fund charges to cover its costs.
4. Exit Load: The investor needs to check to see if the fund imposes an exit load, which is a fee levied if you withdraw your investment within a particular time frame. Knowing the exit burden can aid in planning your investment horizon.
5. Fund Performance: Review the fund's historical performance, but remember that past performance does not indicate future results. Look for consistent performers over different market cycles.
6. Fund Manager’s Track Record: A skilled fund manager can significantly improve a fund's performance. Research the fund manager's track record and experience.

Benefits of Equity Savings Schemes

Investing in equity savings schemes offers several advantages, including:

Minimised Volatility

Equity Savings Schemes are a type of investment where more than 50% of the money is put into safer options like bonds (debt) and arbitrage opportunities. This mix makes these schemes less risky compared to investments that are only in stocks (equities). Fund managers use different strategies involving derivatives (financial tools) to manage investments and benefit from price differences.

Tax Efficiency

Classified as equity funds for taxation purposes, these schemes significantly reduce the tax burden. Investors holding units for over a year and earning returns below Rs 1 lakh are exempt from taxes on those returns.

Arbitrage Advantage

The arbitrage element of these schemes helps to balance out price differences in the market, contributing to more stable and predictable returns.

Diversified Portfolio

Equity Savings Schemes make investing easier by combining different types of investments into one package. Instead of having to pick and monitor several different funds yourself, professionals manage everything for you. This way, you get a mix of investments without the hassle of doing all the research and comparisons on your own.