- Date : 27/06/2023
- Read: 3 mins
Recent tax changes affect debt funds, prompting investors to consider equity savings funds with stable returns, low equity exposure, and favorable taxation. Choose wisely.
- Equity savings funds offer stable returns with 30–40% equity exposure.
- These funds enjoy favourable equity taxation benefits, with LTCG at 10% and STCG at 15%.
- They are not a direct replacement for debt funds.
- Consider factors such as net equity level and credit quality when selecting an equity savings fund.
The recent tax modifications impacting debt mutual funds have left investors with a lower risk appetite seeking alternative investment options.
Equity savings funds, although not a direct replacement for debt funds, have emerged as an attractive choice for those desiring relatively stable returns, low equity exposure, and the benefits of equity taxation.
Let’s consider: Are equity savings funds a viable option following the tax impact on debt mutual funds?
Understanding the characteristics and benefits
Equity savings funds, distinct from other hybrid categories, derive their returns from three sources: stock arbitrage, equities, and debt. These funds balance risk and reward, offering conservative exposure to equities alongside the potential for relatively stable returns.
With a composition of approximately 30–40% in equities, 25–35% in equity arbitrage, and the remaining portion in debt, equity savings funds maintain a modest level of volatility compared to other hybrid funds.
Tax advantage and considerations
Equity savings funds are subject to equity taxation, making them attractive to investors looking to optimise their tax liabilities. With long-term capital gains (LTCG) being taxed at 10% and short-term capital gains (STCG) at 15%, these funds offer favourable tax treatment. However, equity savings funds should not be perceived as a direct replacement for debt funds.
Factors such as suitability for short-term needs, volatility comparisons, and a lack of awareness regarding taxation and diversification benefits have limited their draw to some investors.
Selecting equity savings funds
When considering equity savings funds, several factors should be assessed. These include:
- The fund's net equity level, credit quality of the debt component, and duration risk.
- Your investment horizon, risk appetite, and the fund's historical performance.
- The asset mix of a scheme and its risk-return trade-off to learn the fund's performance across different market conditions.
- Expense ratios and tax benefits.
Appeal and return expectations
Equity savings funds cater to investors seeking moderate growth, a hedging benefit, and a lack of specified time horizons. Those who desire a small allocation to equity (around 35%), a portion of debt allocation, and favourable taxation can find equity savings funds appealing.
Over the span of three years, the category has delivered an average return of 12%, while the five-year average stands at 7.11%. However, equity savings funds carry inherent risks related to interest rate fluctuations and stock price changes.
While equity savings funds offer a clear advantage from a taxation perspective, consider the complexity of their construction. Investors should carefully evaluate the asset mix, equity exposure, capital safety, and asset allocation to align their choice of equity savings fund with their investment goals.
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Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.