Ever wished for mutual fund products that get you close to double digit returns without subjecting your entire portfolio to equity risks? Well, 'equity savings fund' or (aka 'equity income fund') may fit the bill. With 3-year returns of 9% to 12%, equity savings funds do not mirror equity market returns, but are designed to offer debt returns with equity tax breaks.
There are now about 13 specially designated "equity savings funds" in the marketplace today. None of these funds are huge in size, with the biggest of the lot being HDFC Equity Savings Fund (Rs 765 crore), followed by Axis Equity Saver Fund (Rs 743 crore) and Kotak Equity Savings Fund (Rs 727 crore).
Value Research categorizes these schemes in the Hybrid: Equity-oriented category. These funds typically have a 60-65 per cent equity exposure to earn equity tax breaks. But some of the equity positions are in arbitrage opportunities, which earn risk-free, debt-like returns. The rest of the allocation is in debt securities. This asset allocation pattern allows the funds to be treated as equity-oriented for tax purposes, making for higher tax-efficiency, compared to Monthly Income Plans (MIPs) and debt-oriented products. Himanshu Vyapak, Deputy CEO at Reliance Capital AMC explains: "The (equity savings) fund invests at least 65% of the portfolio in equity and equity-related instruments and hence qualifies as an equity offering from a taxation perspective. Thus the fund enjoys superior tax advantage compared to debt-oriented products, including MIPs. The dividends declared in the fund is completely tax-free and for investments held for more than 1 year there is no long term capital gains tax as well."
In the case of debt products, dividends attract a DDT (Dividend Distribution Tax) and investments have to be held for more than 3 years to qualify for long-term capital gains tax, which is 20% plus applicable surcharge and cess.
When asked about the difference between balanced fund and equity-savings fund, PVK Mohan, Head - Equity, Principal PNB Asset Management Company says: "The net actively managed equity component in this fund is in the range of 20-30%, whereas the same can go up to the range of 60- 70% in the case of the balanced fund. The balance equity in the Equity Savings Fund is by way of arbitrage positions." Mohan adds that these type of funds are positioned as 'conservative equity funds'.
So, how have these funds fared? Because equity savings funds do not have a very long track-record, we have looked at returns from 1-year, 3-year and 5-year periods (ended April 21, 2017). Returns in this period have been high thanks to a runaway equity market. HDFC Equity Savings Fund has gained 21.7% in the 1-year period, a cut above other funds that have delivered between 9-14%. Similarly, Birla Sun Life Equity Savings Fund's 17%+ gains may have been driven by over 75% equity exposure - the highest among the peers.
In the 3-year period, there are just 3 funds: Principal Equity Savings Fund (launched in May. 2002). HDFC Equity Savings Fund (Sep.2004) and L&T Equity Savings Fund (Oct. 2011). The returns range between 9%-14%. In the 5-year period, returns of most equity savings funds remain in 7%-10.5% range.
Experts from the fund industry say that more than the returns, it is the lower risk of these funds that is their USP. They are thus marketed to conservative investors trying to seek income from their investment and not wanting to assume great risk. Financial investors can look at beta, a measure of the volatility, of funds. Value Research data shows that hybrid-equity oriented fund category sports a beta of 0.89. In comparison, equity-savings funds have a much lower beta in the range of 0.3-0.5. This shows that the NAVs of these funds will not be as susceptible to market crashes as pure equity funds.