Are you worried about falling markets and therefore want to reduce your exposure to equity and move to debts for fix income? Do you want to have minimum exposure to equity and benefit of debt securities? Do you want to have less than 35% net exposure to an equity fund, still want the tax benefit as that of equity fund?
If you have same concern as above then equity savings funds are for you. Read on for more information.
Mutual Fund Types
First, you should know that Mutual Funds are broadly classified into three categories. They are Equity Mutual Fund, Debt Mutual Fund, and Hybrid Mutual Fund. An Equity Mutual Fund predominantly invests the money into Shares of listed companies. Some part of it( less than 10%) can be in the form of cash or debt funds.
Similarly, Debt Mutual fund mainly invests in debt securities.
Whereas Hydrid mutual fund invests in Equity and debt both. If it invests more than 65% in equity than it attracts tax benefit of Equity mutual fund.
Taxation for Equity and Debt Mutual Fund
If you have invested in debt mutual fund for less than 3 years then you will have to pay taxes as per your income slab and you will not get indexation benefit. Whereas in equity mutual fund ( or funds which have more than 65% exposure to equity) you will get tax benefit after 1 year.
Therefore if your horizon is for between one to three years and you don’t want to risk too much by having less exposure in equity then Equity savings funds will be best suited for your need.
Equity Savings Funds
Equity Savings funds have less than 35% exposure in debt funds and more than 65% in equity-oriented funds. Therefore it attracts tax benefit of equity mutual fund.
You might ask how come if it is having 65% equity exposure will be better than other equity funds specially in turbulent times like this. and answer to this question lies in 65% equity exposure which has around 75 to 80% as arbitrage funds ( Arbitrage funds are equity-oriented funds which provide almost risk-free returns equivalent to FD) and remaining 15 to 20% is invested in pure Equity( Listed Shares of Companies)
So your risk as far as Equity Exposure is concerned restricted to 15 to 20 %, whereas you get the tax benefit of equity funds.
Equity Savings Fund is not an alternative to Equity or Hybrid Funds
Please do note that Equity Savings Funds are by no means should become a replacement for a pure equity fund for the long term. You should only invest in them if you want limited exposure to equity and harness the benefit of an Equity mutual fund in terms of taxation.
For a period of 3 years, you can expect a return between 7 to 9 % cumulative annually.
In Summary, you may wish to invest in Equity savings fund if:
- You want to limit the exposure of equity to 15-30 %
- You want to gain tax benefits of an Equity mutual fund while getting safety and returns of debt mutual fund.
- The market is expected to remain highly volatile and you want to invest for 1-3 years duration. ( at least 1 year for tax benefit)