Mutual Funds: Equity Savings Funds Pique Investors’ Interest

Equity savings funds have piqued the interest of many investors, especially those keen on gaining stable returns. This is due to their unique investment strategy and the benefit of equity taxation. 

Equity savings funds tend to delegate the decision of optimal asset allocation between debt and equity to professional fund managers. These are being looked upon as an alternative to debt funds. 

Equity savings funds are mandated to hold about 65% equity investment and a minimum of 10% in debt. Such hybrid funds tend to invest in equities (30-40%), debt securities (30-45%) and equity arbitrage (25-30%) to gain from capital appreciation, manage risk and boost returns in the bargain.

The equity component leads to the potential for higher long-term returns, while the debt portion provides a steady income, thus acting as a cushion against the volatility related to equities.  

As a result, volatility in returns tends to be relatively low. However, these can experience high volatility during moments of significant equity market dips. 

The Union Budget 2023-34 introduced the amendment of taxation of debt funds by removing the indexation benefits. This move resulted in an increase in the tax liability for investors. 

However, equity funds, including equity savings funds, have continued to retain their tax structure. This includes a 10% long-term capital gains  (LTCGs) tax on profits above Rs 1 lakh and a 15% short-term capital gains tax (STCGs).

The fact that debt funds tend to attract marginal income tax, equity savings funds provide investors with an opportunity to create an investment portfolio in which the debt portion is allocated within a savings fund and gain the debt returns while having equity taxation on gains. 

This ensures a better tax-efficient alternative instead of debt funds alone, provided it is held for more than 12 months. Stable returns while ensuring low tax liability are the twin benefits that add to the appeal of equity savings funds among investors. 

Ideally, an investor with a focus on a financial horizon of three-five years can opt for equity savings funds. This way, return expectations are slightly more than debt fund returns, and it would be possible to tide over market dips in the short term. 

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