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With the surge in stocks making investors edgy, pure equity funds seem risky. But pure debt funds are no great alternative either, courtesy the ultra-low interest rate scenario . In this backdrop, many think equity savings funds is a good idea as they are safer than regular equity funds while enjoying tax treatment similar to regular equity funds.
But, it’s not as simple as this. Since equity savings funds allocate their money to hedged and unhedged equity and debt assets, the unhedged equity portion of these funds could expose them to the vagaries of the stock market. Plus, the equity allocation to large- and mid-caps can differ across funds, as can the credit quality of debt exposure. So, it is important for investors to understand the pros and cons before taking a decision.
Features
Equity savings funds invest in equity, debt and arbitrage opportunities. As per SEBI, this category of funds should invest a minimum of 65 per cent in equity (including arbitrage exposure) and equity related instruments, and at least 10 per cent of the assets in debt.
The equity portion covered with an arbitrage exposure is considered hedged. The unhedged portion is the direct equity exposure, which can add an edge to returns. The debt and arbitrage exposures provide stability to the returns of these funds. However, the returns also depend on the availability of arbitrage opportunities in the market.
As on April 30, for instance, equity savings funds from Principal, HDFC, Edelweiss, Invesco and ICICI Pru have unhedged equity exposure of 49.17 per cent, 39.8 per cent, 36.03 per cent, 27.48 and 15.22 per cent respectively. The unhedged exposure is otherwise stated as net equity in the fact sheets of the AMCs.
There are no guidelines for the extent of hedged/unhedged portion of equity. Further, the funds have the flexibility to invest across market cap and sectors. According to ACE MF, the average mid-cap exposure in equity savings funds is 7.5 per cent but there are quite a few schemes with 15-25 per cent in mid-caps, which increases the risk as well as return potential. Thus, one has to do proper due diligence on the equity exposure before selecting a fund so that it matches one’s risk appetite.
The equity and debt portion of the funds on an average, is at 68 per cent and 16 per cent respectively as on date.
Out of the total assets, the funds on an average, invest 6 per cent in AAA bonds and 5 per cent in AA, AA +/- instruments.As on April 30, Sundaram Equity Savings has the highest AAA exposure at 10.27 per cent and HDFC Equity Savings, the highest exposure to AA/AA +/- at 15.28 per cent.
Lags benchmark returns
As of today, there are 25 schemes in this category and most of them have been benchmarked to Nifty Equity Savings TRI.
Over the past one, three and five years, this category has underperformed the benchmark as can be seen from the table.
Based on five-year return, the top funds include HDFC Equity Savings, Edelweiss Equity Savings and Aditya Birla Equity Savings Fund. Out of these, only HDFC scheme has beaten the five-year return of the benchmark by a few basis points.
These funds, for taxation purpose, are considered as equity funds since they are required to hold at least 65 per cent in equities (including derivatives). The redemptions from these funds are taxed at 15 per cent for short-term capital gains tax for gains up to one year and 10 per cent for a longer holding period for gains above ₹1 lakh.
Suitability
Equity savings funds, while lagging the benchmark, boast of returns higher than conservative hybrid schemes, which invest 10-25 per cent in equity and the rest in debt instruments (see table). Do note that it may not be a like-to-like comparison as equity savings may have higher unhedged equity portion. Thus, the drawdown of conservative hybrid funds was lower than equity savings funds during the market crash in March 2020, for instance.
Investors who can take slightly higher risk than conservative hybrids but whose risk appetite is not suitable for aggressive hybrids (up to 80 per cent equity), can consider equity savings funds. It suits those who are looking for relatively stable returns with low to moderate exposure to equity.
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