Equity savings funds are increasingly getting popular among investors. In just two years, the category now has over Rs.3300 crore of assets.
These schemes aim to generate income by predominantly investing in arbitrage opportunities in the cash and derivative segment of the equity market and enhance returns with a moderate exposure in equity. Under normal circumstances, the scheme would invest atleast 40% in arbitrage opportunities, up to 35% in debt and money market and up to 25% in unhedged equity.
Typically, arbitrage portion in such funds take advantage of the difference in prices of shares in cash and derivatives market. Simply put, the arbitrage funds primarily use hedging strategies. Though these schemes invests majority of its portion in arbitrage opportunities, the active allocation in equity market differentiates it from other funds.
Financial advisors say that these fund which seek to offer equity exposure coupled with safety are a better alternative to MIPs. Fund houses started launching these funds after the Budget ended the tax advantage, which debt funds enjoyed over other fixed deposit products. Long-term capital gains tax from non-equity oriented funds is now taxed at 20% tax after indexation unlike 10% earlier from April 01, 2014.
Unlike earlier, debt fund investors now have to stay invested for three years to qualify for long-term capital gains tax. Thus, fund houses have packaged these funds in such a way that they offer better tax efficiency, equity exposure coupled with safety.
S Naren, CIO, ICICI Prudential believes that these funds are best suited for conservative investors. “Given the recent macro and micro economic developments in the country, the two major financial asset classes - equity and debt - are in a sweet spot right now. We believe that a fund, which invests a major portion of the portfolio with an aim to generate stable income and a moderate portion towards imparting growth to the portfolio, could be a suitable product for conservative investors.”
|
Fund houses |
AUM |
|
BSL Equity Savings Fund |
366 |
|
kotak Equity Savings Fund |
679 |
|
Reliance Equity Savings Fund |
574 |
|
SBI Equity Savings Fund |
350 |
|
ICICI Prudential Equity Income Fund |
812 |
|
DSP BlackRock Equity Savings |
404 |
|
Edelweiss Equity Savings Advantage |
167 |
|
Total |
3352 |
We asked advisors whether it is worth investing in these funds.
Ritesh Sheth of Tejas Consultancy says that these funds are good from a tax efficiency perspective. “These funds are ideal for investors with a time horizon of 12 to 18 months. The arbitrage exposure can protect the portfolio from any downside in equity markets. With minimum risk these funds provide an opportunity to participate in equities. The debt portion would also be safe as they don’t plan to take any duration calls. If equity markets perform well these funds can give double digit returns.”
Vinod Jain of Jain Investments said that these funds have lived up to the expectations. “This is a category which will grow as currently there is no options for investors with a time horizon of one to three years. These funds are well suited for individual investors.”
However, a few experts have a different opinion. “These funds will work only if there are enough arbitrage opportunities available in the market. If there aren’t enough arbitrage opportunities, these funds will increase exposure to equity and debt which will make them look like any other balanced fund,” cautions a Mumbai based adviser.
Let us know your views.
