Tags: Wealth Management, Investment Lesson, Mutual Funds, Stock market, Budget, Finance, Investing, Personal Finance, Investment
Article Summary
An Equity Savings Fund is a hybrid mutual fund that primarily invests in equities and derivatives, besides debt.
While derivatives and debt investments control the volatility, equity investments help investors benefit from its typical long term growth.
Investments in equities and derivatives help Equity Savings Fund pay lower capital gains tax due to its tax treatment as an equity fund.
It is not uncommon for some investors to want the typical high growth from equities but somehow avoid their characteristic short term volatility. Mutual funds try to provide the best of the two worlds with an Equity Savings Fund, also known as Equity Savings Scheme.
What is Equity Savings Fund? It is a hybrid mutual fund which primarily makes investments in equities and derivatives taking advantage of arbitrage opportunities in the market and is supplemented by debt investments. While derivatives and debt investments control the volatility compared to pure equity funds, equity investments in an Equity Savings Scheme ensure that the investors can benefit from the typical long term growth from equity investments.
Four Advantages of Equity Savings Fund
Equity growth advantage Investors in Equity Savings Funds get the typical benefits of long term growth from investments in equities.
Controlling risk and volatility with debt investments As with other hybrid funds, debt investments help the fund managers reduce volatility in returns and manage risks.
Volatility management and growth from derivatives With investments in derivatives, an Equity Savings Scheme tries to exploit investment opportunities during periods of higher volatility, by investing in volatility managing investments of derivatives. It tries to make the most of price differentials in various market segments like cash and futures markets.
Benefit of tax-efficiency Since derivatives get taxed as equities, equity savings funds have 65% or more in equities and derivatives and thus get taxed like equities. Thus, capital gains made from investments less than one year will be considered as short term capital gains and pay 15% short term capital gains tax.
Capital gains from investments of more than 1 year are considered long term capital gains and need to pay long term capital gains tax. While Rs 1 lakh in a financial year is tax exempt, capital gains exceeding the amount are charged 10% long term capital gains tax.
This means that compared to interest bearing investments, and debt investments bearing capital gains which get taxed at the applicable income tax rates, capital gains from Equity Savings Schemes get taxed at a lower rate.
How Equity Savings Schemes Work for Medium Term Goals
Meeting medium term goals
Depending on the amount of equity investments, equity savings funds can ideally work well for goals that are up to 5-6 years away. For example, down payment for a home or seed capital for a startup. Such a time horizon can help the investments ride out the periods of short term turbulence and benefit from the typical growth from equities.
Boosting regular income
Equity Savings Schemes can also be helpful in boosting regular income, especially retirement income in middle and late retirement years, with a part of retirement savings invested in them. With inflation eroding the purchasing power of regular income, 5-7 years into retirement, a boost can be provided to the regular income with Systematic Withdrawal Plan (SWP) on Equity Savings Funds. The move also helps investors receive a favourable tax treatment compared to interest income and regular annuity payments from life insurance companies.
To sum up, thanks to the composition of their investments, Equity Savings Funds are well positioned to balance the tasks of delivering high growth and containing volatility. Little wonder, investors find them attractive during times of volatile markets, high inflation, and rising interest rates.
FAQs
Who should invest in an Equity Savings Scheme?
Investors wanting some exposure in equities for growth but avoiding volatility are ideal candidates for Equity Savings Scheme. These investments can meet needs 5-6 years away.
How do returns for longer term debt funds compare with Equity Savings Schemes?
While the risk associated with the funds depends on their investment portfolio and reflected by Risk-O-Meter in scheme documents, Equity Savings Schemes can not only manage volatility through derivatives investments, but investors also pay a lower capital gains tax thanks to their treatment as equity funds. This can result in superior returns compared to longer term debt funds in a narrow comparison restricted to returns and no other essential attribute.
Disclaimer:
The information set out above is included for general information purposes only and is not exhaustive and does not constitute legal or tax advice. All complaints regarding Mutual Fund can be directed towards visit www.scores.gov.in (SEBI SCORES portal). Readers are requested to make informed investment decisions and consult Chaitanya Financial Consultants – 9000628943 / mfd.mmr@gmail.com to determine the financial implications with respect to investing in Mutual Funds.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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