When you want your investment to generate regular income, debt funds may seem the ideal option but they are not the only ones. The equity savings scheme is one non-debt option that presents a strong case to generate regular income.
Equity savings fund is a hybrid fund which invests 30-40% in equities, 25-35% in equity arbitrage and the rest 25-35% in debt. The use of arbitrage strategy makes it a unique offering — a fund having advantages of both equity and debt offering. Here's how:
More tax efficient than debt funds
As arbitrage is an equity-based strategy, the overall equity allocation of these funds is always above 65% (30-40% in equities and 25-35% in arbitrage). As a result, the fund is eligible for equity taxation, which is often lower than debt funds.
That means, when an investor redeems her investment after a year, she can avail benefits of long-term capital gains tax i.e. you get tax exemption on gains of up to Rs.1 lakh. Gains of over Rs. 1 lakh will be taxed at 10%. However, gains from debt funds are added to your annual income for taxation if redeemed before 3 years.
Low downside risk
As the arbitrage and debt portions of the fund are not prone to high downside risks, the equity savings scheme carries limited risk of capital loss.
Scores well on all parameters
For a fund to serve as a regular income generating option, it should have the following qualities —less volatility, liquidity and tax efficiency.
Equity savings scheme perform well in all these aspects. Limited equity investments and predictable debt and arbitrage returns prevent high volatility. Redemption in equity savings scheme is also easy as they do not have any lock-in period and come with no or limited exit load.
Historical data shows that equity savings schemes have beaten debt fund by a good margin in terms of returns. Value Research data shows that equity savings scheme have generated annual return of 11% over the past three years.
All in all, equity savings schemes are a good option for generating regular income. Since the returns are somewhat less volatile, investors can make timely redemptions to meet their needs. However, they carry higher risks compared to debt funds, especially those that invest only in top-rated papers like corporate bond funds and banking and PSU funds.
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