Equity savings fund | Types of hybrid fund

Описание: In the next episode of our hybrid funds series, we are going to discuss all about Equity savings funds.

What are Equity Savings Funds?
These were introduced in 2017 and like any other hybrid fund, they also invest in both equity and debt. But there is also an additional benefit called arbitrage opportunities, which adds safety to your portfolio.

Now, what is arbitrage opportunity?
In order to protect from the downside, your fund manager hedges your portfolio by taking contra positions in the derivatives market against the cash market.
This is to ensure that even if there is a fall in the equities, the effect will be balanced due to the hedged fund in the derivative market. This is why equity savings funds are considered safer than aggressive hybrid funds. The downside is protected in this case.
As per regulation, equity savings funds invest a minimum of 65% in equity and equity related instruments and a minimum of 10% in debt instruments. The rest are arbitrage positions to hedge the portfolio.

Who should invest in equity savings funds?
i) Conservative investors who cannot stomach volatility but want some equity exposure, should go for an equity savings fund.

ii) Investors who are looking to achieve their short-term goals by investing in equity savings funds. Keep a time horizon of two-three years when investing in these funds.

iii) These funds tend to give you better returns than pure debt funds or fixed deposits and are more tax-efficient.


Taxation in equity savings funds
Equity savings funds are taxed like equities. This means, long-term capital gains (LTCG) exceeding Rs 1 lakh are taxed at 10% if you sell your investment after one year, and short-term capital gains (STCG) are taxed at 15% if you sell your units before one year.

How to choose equity savings funds
There are three basic parameters to pick a suitable mutual fund from a category:
i) Past performance – Long-term and consistent performance of a fund generally make it more reliable.
ii) Expense ratio – The expense ratio is the cost that you pay to your fund house to manage your portfolio. Some funds have a very high expense ratio which is not desirable.
iii) Credibility – Since your money is at stake, you have to make sure that the fund house and the fund manager are trustworthy and experts in their domain. A credible fund manager will also charge you more than the average price occasionally. But it is worth it for its credibility and trustworthiness.

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