Every mutual fund option has its own set of benefits and drawbacks. Funds that deliver high returns come with high risks while the safer ones do not deliver high returns. Although, no investment option can bypass this risk-return nexus, there are some mutual funds that score well on all the three parameters of investment — risk, return and taxation.
One such fund category is equity savings scheme. The scheme invests 30-40% in equities, 25-35% in equity arbitrage and the rest 25-35% in debt. The hybrid approach helps the fund to strike a good balance between risk and reward. And most importantly, the fund is tax efficient as its returns face equity taxation.
MFDs say that the fund category suits conservative investors in the current scenario, when debt funds face high interest rate risk.
"If you look at fixed income right now, the returns are low and risk is high. Sooner or later, RBI will hike interest rates. If an investor is comfortable with some equity exposure then equity savings scheme is the way to go," said Shifali Satsangee, Founder, Funds Vedaa.
Where does it fit in clients' portfolio?
In a diversified portfolio, half of the hybrid fund allocation can go to equity savings fund, say MFDs. If 20% of the portfolio is reserved for hybrid fund then one part (10% of overall portfolio) can be invested in equity savings scheme and the other half can be put into any other hybrid fund (aggressive, balanced advantage or conservative) based on the risk profile of the client.
Viral Bhatt of Money Mantra believes that clients who want to transfer their fixed deposit to mutual funds should invest in this fund. "This is a clear cut alternative to fixed deposits. Equity exposure is very low and is mostly limited to largecap stocks," he said, adding that the tenure should ideally be two-three years.
Equity savings vs conservative hybrid
On the risk ladder, the two funds fall almost in the same position as both take a very limited exposure to equities. So, which fund should your ideal recommendation for conservative investors?
According to Shifali, equity savings should be preferred right now and there are two reasons for it. One is tax efficiency and the other is current interest rate scenario. "From the tax efficiency and interest rate perspective right now, it's better to go for equity savings fund then a debt-dominated scheme," she said.
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