Skip to main content

Equity Savings Funds

Equity Savings Funds - Invest Online
 
 

Equity savings funds are a new variant in the equity mutual fund basket. Exposure to equity, a part of which is hedged, and then some debt, and you have this new fund category. Before going into this product's details, let's understand the reason for this new category coming into the mutual fund universe.

In the last Budget, the government increased the holding period for debt funds to three years in order to get indexation benefits. Else, you would be taxed at your slab rate. That means debt and debt-oriented funds such as Monthly Income Plans (MIPs) would have the same tax treatment as Fixed Deposits (FDs) for holdings up to three years.

Equity savings funds, as a category, came into being to provide MIP-like returns, while trying to address the concerns of this set of investors.

The Category

Equity savings funds aim to generate returns from equities, arbitrage trades, and fixed income securities. To retain equity taxation, funds will restrict the fixed income (debt) exposure to 35 per cent. Besides, to reduce volatility and hedge the portfolio, these funds actively use derivative strategies.

Still, some amount of equity is unhedged (pure equity cash market) to prop up the returns of the portfolio. The equity and the derivative exposure is considered as 'equity' allocation and hence, these categories of funds are treated as equity funds. The unhedged equity exposure typically ranges from 15 per cent to 40 per cent, and the rest of the portfolio is hedged to gain from arbitrage opportunities.

Before going into what these funds are, and when they will suit you, it is first important to know that these funds cannot build long-term wealth efficiently like pure equity funds. To this extent, one should not view these in the same light as equity for long-term portfolios. What equity savings funds offer is stability and tax efficiency; the latter when compared with debt.

These funds are suitable for those looking for some equity exposure but do not have a very long time frame. They suit those with limited risk appetite and looking for less uncertainty in returns. Many of these funds seek to provide regular dividend income although they are not mandated to do so.

They are certainly not substitutes for pure equity funds, especially for long-term portfolios, and fit those with a 2-3 year time frame who want tax benefits that are not available in debt-oriented funds for such a short time period.

Positioning

If you plot the fund categories on a risk-return axis, equity savings funds are positioned between MIP funds and balanced funds. They stand a notch higher than MIP / debt-oriented funds, and one notch lower than balanced funds in their risk-return proposition.

img_1

How does arbitrage generate returns?

Arbitrage funds look to exploit arbitrage opportunities (the price difference in securities) in different segments of markets. Fund managers opine that there are significantly higher arbitrage opportunities in a bull market, but lesser during falling or flat markets.

Let us assume that ABC Ltd. trades in the National Stock Exchange (NSE) cash market for Rs. 100, and Rs. 101 (same month futures price) in the futures market. By the end of the month, the future price converges with the cash price. Buying in the cash market and selling in the futures market will entitle a gain of 1 per cent. If we assume a 0.2 per cent brokerage for these transactions, then the net gain is 0.8 per cent, or an annualised return of 9.6 per cent.

img_2

Pure arbitrage funds hedge their cash positions entirely and hence, the return from a market movement (from unhedged equity) is ruled out. In equity savings funds, there is a good chunk of unhedged equity that can generate returns higher than arbitrage funds. To this extent, equity savings funds carry far higher risk and higher return potential than arbitrage funds.

Category Performance

Given that many of the funds in this category are of recent origin, they do not have much of a track record. But when reviewing their performance thus far, it appears that they have performed well in relation to the CNX Nifty. In the below chart, the Nifty has fallen by around 5 per cent, while equity savings funds delivered positive returns that range from 1.6 per cent to 3 per cent in the last six months. Their arbitrage component and debt allocation clearly helps these funds in down markets.

img_3

The unhedged equity portion differs from fund to fund, and also varies in different time periods. Higher the unhedged portion (net equity exposure), higher the volatility. Hence, you need to check this information before investing in these schemes. For instance, Edelweiss Absolute Returns also follows a similar strategy, but can take a much higher unhedged equity exposure (we have therefore, not brought the fund under this category).

SchemeUnhedged portion
Birla Sun Life Equity Savings Fund – Reg. – Growth20% – 45%
ICICI Prudential Equity Income Fund – Reg. – Growth20% – 40%
Kotak Equity Savings Fund – Reg. – Growth15% – 25%

Equity savings funds – How they stack up

img_4

Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2016

1.ICICI Prudential Tax Plan

2.Reliance Tax Saver (ELSS) Fund

3.HDFC TaxSaver

4.DSP BlackRock Tax Saver Fund

5.Religare Tax Plan

6.Franklin India TaxShield

7.Canara Robeco Equity Tax Saver

8.IDFC Tax Advantage (ELSS) Fund

9.Axis Tax Saver Fund

10.BNP Paribas Long Term Equity Fund

You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds

Invest in Tax Saver Mutual Funds Online -

Invest Online

Download Application Forms

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

---------------------------------------------

Leave your comment with mail ID and we will answer them

OR

You can write to us at

PrajnaCapital [at] Gmail [dot] Com

OR

Leave a missed Call on 94 8300 8300

---------------------------------------------

Invest Mutual Funds Online

Invest Any Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

Popular posts from this blog

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

Mutual Fund Review: HDFC Index Sensex Plus

  In terms of size, HDFC Index Sensex Plus may be one of the smallest offerings from the HDFC stable. But that has not dampened its show, which has beaten the Sensex by a mile in overall returns   HDFC Index Sensex Plus is a passively managed diversified equity scheme with Sensex as its benchmark index. The fund also invests a small proportion of its equity portfolio in non-Sensex scrips. The scheme cannot boast of an impressive size and is one of the smallest in the HDFC basket with assets under management (AUM) of less than 60 crore. PERFORMANCE: Being passively managed and portfolio aligned to that of the benchmark, the performance of the index fund is expected to follow that of the benchmark and in this respect, it has not disappointed investors. Since its launch in July 2002, the fund has outperformed Sensex in overall returns by good margins.    While every 1,000 invested in HDFC Index Sensex Plus in July 2002 is worth 6,130 now, a similar amount invested in Sensex then wo...

Mirae Asset Emerging Bluechip Fund

Start Saving for Tax 2018 by Investing in ELSS Funds Online HOW HAS THE Mirae Asset Emerging Bluechip Fund PERFORMED?   With a 7-year return of 25.08%, the fund has outperformed both the category average return (18.04%) and benchmark (13.4%) by a wide margin.   Growth of Rs 10,000 vis-a-vis category and benchmark   Mirae Asset Emerging Bluechip Fund   is a mid-cap oriented fund continues its stellar run, clocking another year of outperformance over benchmark and peers—a feat it has achieved every year since inception. The fund manager plies a strictly bottom-up approach to stock selection and keeps risk contained by focusing on larger mid-caps. A year ago, it had stopped accepting lump sum investments and now the fund has also put restrictions on SIP investments—only allowing SIP on the tenth of every month with an upper limit of Rs 25,000.   It has done so to preserve its return profile in the face of mounting inflows and stretched valuations in the mid-cap space. This step should hel...

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...

Section 80CCD

Top SIP Funds Online   Income tax deduction under section 80CCD Under Income Tax, TaxPayers have the benefit of claiming several deductions. Out of the deduction avenues, Section 80CCD provides t axpayer deductions against investments made in specific sector s. Under Section 80CCD, an assessee is eligible to claim deductions against the contributions made to the National Pension Scheme or Atal Pension Yojana. Contributions made by an employer to National Pension Scheme are also eligible for deductions under the provisions of Section 80 CCD. In this article, we will take a look at the primary features of this section, the terms and conditions for claiming deductions, the eligibility to claim such deductions, and some of the commonly asked questions in this regard. There are two parts of Section 80CCD. Subsection 1 of this section refers to tax deductions for all assesses who are central government or state government employees, or self-employed or employed by any other employers. In...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now