Mutual funds take varied forms, among which equity saving schemes are worth noting. As the name might suggest, an equity saving scheme is responsible for investing its entire fund amount into a mix of equity funds, debt funds and arbitrage. These funds diversify their holdings in a bid to neutralize the volatility that is part and parcel of the stock market.
Under equity saving schemes, around 30 to 35 percent of the fund’s investment corpus is directed towards equity assets. The remainder is invested in arbitrage and debt income funds. This method of investment makes these funds vary from other mainstream investment schemes. That said, it is possible to compare them to balanced funds in terms of their operations.
Given that these funds invest in multiple segments, they are able to maximize investors’ returns on investment while simultaneously balancing rewards and smart risks. As a result, equity schemes are ideal for conventional investors who seek to draw high returns. Additionally, investors hoping to gain capital in order to complete short-term goals in the near future can opt for these schemes.
Equity saving schemes are made up of several components which serve varied purposes. These have been broken down below.
To understand these components better and the value they serve, consider the following example. Mr Draper invests in XYZ’s equity saving scheme for a year, following which the value of the fund declines by 7 per cent. However, since the debt component of the scheme generates an annual return of 5 per cent and the arbitrage component brings in 4 per cent returns, XYZ’s investors like Mr Draper need not worry as their losses will be minimized to a certain degree.
This example shows how even though the cumulative return from an equity savings scheme could decline due to a dip in the equity segment, this decline can be marginal. This lies in contrast to equity market schemes and balanced funds where negative returns would have been generated in such a situation.
The taxation norms governing equity savings schemes are similar to those applicable to hybrid equity funds and balanced funds. This means that they are treated in the same manner as equity funds for the purpose of taxation.
If you hold your units of such a scheme for a period that amounts to a year or more, they are classified as long-term capital gains. Amounts up to Rs 1 lakh drawn from these schemes in a given financial year are tax-free. If your gains exceed this value, they are taxed at 10 per cent.
In case you hold units of such a scheme for a period that falls below a year, your gains are classified as short-term and are taxed at 15 per cent. It is worth noting that any dividends paid by equity saving schemes have taxes applicable that are meant to be paid by investors.
An important factor worth noting here is that if an investor holds units of these funds for under a year, they will be charged an exit load at the rate of 1 percent.
These schemes allocate over 50 per cent of their corpus towards debt and arbitrage. Therefore, they are characterized by more stable returns in comparison to entirely equity-oriented holdings. In fact, fund managers often utilize a number of derivative strategies. The arbitrage component of these funds helps tackle price inconsistencies within the markets.
As equity saving schemes are classified as equity funds for taxation purposes, the tax burden of this investment is significantly reduced. If an investor holds units of such a fund for over a year and draws returns under Rs 1 lakh, they don’t need to pay taxes on the same.
The arbitrage aspect of equity saving schemes brings its own advantage in terms of stabilizing returns. Simply put, strategically dealing with arbitrage allows for low-risk returns. The addition of this component to an equity saving scheme helps provide stable returns.
Equity saving schemes provide their investors with a diversified investment portfolio that is accessible via a single investment. This means that investors don’t need to analyze, assess and compare the performance of varied funds. Instead, they can simply invest in an equity saving scheme and let asset managers cover fund selection.
Equity saving schemes can help investors fulfill their short or medium-term goals. They provide reasonable returns and are relatively safe owing to the arbitrage advantage they carry. Prior to selecting an equity saving scheme for yourself, you must always read the fine print and understand the terms and conditions that apply.
A1. An equity saving scheme is responsible for investing its entire fund amount into a mix of equity funds, debt funds and arbitrage. These funds diversify their holdings in order to neutralize the volatility associated with the stock market.
A2. An equity savings scheme operates by investing around 30 to 35 percent of its investment corpus in equity assets. The remainder is invested in arbitrage and debt income funds. The debt and arbitrage components help cushion the volatility associated with equity. This allows investors to enjoy relatively low-risk returns.
A3. An equity-linked savings scheme serves as a form of a mutual fund that primarily invests in equity. This open-ended mutual fund provides superior returns and tax benefits. It is important to note that these funds are tethered to a 3-year lock-in period. Investors can exit these schemes by selling their holdings only after this time frame finishes. These schemes aren’t to be confused with ELSS funds.