Mutual Funds for Retirement Planning: A Note on Equity Savings Fund

Mutual funds are one of the potential avenues to plan a retirement corpus. In the universe of mutual funds are hybrid funds, which are known to fine-tune their equity and debt exposure based on risk and reward, offering a dynamic approach that aligns with the cautious nature of a risk-averse investor. 

Within the realm of hybrid funds, there is the concept of equity savings fund, which remains an intriguing fund category in itself.

Equity savings funds are typically hybrid mutual fund schemes in a blend of equity, arbitrage, and debt. What sets this fund apart is the use of arbitrage. This unique feature not only aims to lower the overall risk of the fund but also helps maintain equity taxation benefits as per the prevailing provisions of the Income-Tax Act (ITA), 1961. 

An eye on advantages of equity savings fund:

Stability in volatility: While traditional investments like Fixed Deposits (FDs) offer stability, they might fall short in terms of wealth accumulation. On the other hand, equity savings struck a harmonious balance among equity, arbitrage, and debt, providing stability with growth potential. The historical performance of the Nifty Equity Savings Index showcased lower volatility than pure equity indices such as the Nifty 50 Total Return Index, offering a smoother ride for conservative investors.

Over a three-year daily rolling period since April 1, 2005, the standard deviation (a measure of risk or volatility) was 2% for the Nifty Equity Savings Index versus 7% for the Nifty 50 Total Return Index. Typically, a lower standard deviation means lower risk.

Reasonably consistent returns: As a conservative investor usually prefers stable returns and risk aversion, the consistency offered by the Nifty Equity Savings Index will be appreciated by them. For instance, on average, the five-year returns of the index have been over 7% on over 87% of the observations. This is as per data as of November 30, 2023. The data is based on rolling returns calculated since inception, that is 2005 of the index at a daily frequency. The past performance may or may not be sustained in the future and is not a guarantee of any future returns. 

Systematic Withdrawal Plan (SWP): The  SWP in mutual fund schemes offers some unique advantages. This feature allowed conservative investors to withdraw a fixed amount at regular intervals systematically. 

It is important to note that withdrawals under SWP happen from the capital and appreciation portion of the investments and there may be tax consequences. 

For any investor, it is important to understand that the money journey is not just about numbers but is a tale of crafting a resilient and balanced financial strategy that can stand the test of time. 

In this regard, equity savings funds are known to offer unique advantages; a conservative investor can embrace a new chapter in their financial life, steering for well-planned retirements.