These funds aim to provide better than fixed income returns at the same time provide equity like tax status to investors.
After the budget dealt a blow to debt funds by increasing the definition of long term to three years, fund houses are finding innovative ways to provide tax relief to investors. Recently, Kotak and JP Morgan Mutual Fund have come out with funds which dabble in arbitrage, equities and debt market and at the same time provide equity like tax status to investors.
Both Kotak’s Equity Savings Fund and JP Morgan’s India Equity Savings Scheme are currently open for subscription and close on October 01.
Financial advisors say that investors who don’t want to lock in their money for three years in debt funds can consider these funds. Apart from safety, these funds also give an opportunity to earn higher returns through equity exposure.
To get equity tax treatment, these funds invest at least 65% in equity which includes exposure to arbitrage. JP Morgan’s India Equity Savings Fund invests a minimum of 55% in arbitrage opportunities and 20% in equities which takes the total exposure to equity asset class to 75%. Similarly, Kotak Equity Savings Fund will invest 40% in arbitrage opportunities, up to 35% in debt and money market and up to 25% in unhedged equity.
In a press note Kotak MF said “Equity oriented schemes have to invest a minimum 65% in equity instruments. For Kotak Equity Savings Fund to be categorized as an equity fund, at least 40% of the corpus needs to be deployed in arbitrage trades if directional equity is at 25%. The top 5-7 stocks are likely toaccount for around 40% of the corpus. This means that even if the arbitrage opportunities become concentrated in a few stocks, it’s easy to deploy 40% of the corpus in the top arbitrage stocks. In fact, the roll spreads in the top arbitrage stocks are generally 15-20 bps higher than those in the remainder of an arbitrage portfolio in the industry. So, the arbitrage portion of this fund would likely be in a better position to capture this.”
JP Morgan believes that the rates across the curve could fall over the next 18 to 24 months which makes it an opportune time for debt investors. In a press release, Nandkumar Surti, MD & CEO, JPMAM said, “There is mounting evidence that the level of economic activity is picking up. This will improve the topline growth and result in faster earnings growth for corporate India. Over the next few years we are positive that the Indian economy will deliver returns well above its long term CAGR return. JPMorgan India Equity Savings Fund is made for investors who look to diversify their portfolio to obtain a lower-risk investment than a pure equity fund, but with greater prospects for growth than a pure fixed income fund. ”
JP
Morgan’s fund note claims that this fund has the potential to deliver better
post-tax returns at a similar level of risk compared to hybrid or monthly
income plans. MIPs typically invest a majority, usually 75%, of the corpus in
debt and the rest in equity which makes them as debt funds.
Hemant Rustagi of Wiseinvest Advisors feels 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.”
Typically, arbitrage funds take advantage of the difference in prices of shares in cash and derivatives market. These funds can deploy their money in short term debt or money market securities when the fund manager does not find any arbitrage opportunities. Simply put, the arbitrage funds primarily use hedging strategies.
Vinod Jain of Jain Investments says that these funds can beat 1 year post tax fixed deposit returns even if the equity markets don’t do well. “This a good category which will grow and many more fund houses will come up with such funds. Currently there is no choice for investors who have a time horizon of one to three years. These funds are best suited for individual investors.”
Going by the feedback from the industry, this is likely to emerge as the next big category for investors.
