{"id":27636,"date":"2023-06-27T15:00:48","date_gmt":"2023-06-27T09:30:48","guid":{"rendered":"https:\/\/fundsindia.com\/blog\/?p=27636"},"modified":"2023-06-27T15:07:06","modified_gmt":"2023-06-27T09:37:06","slug":"decoding-equity-savings-funds-are-they-right-for-you","status":"publish","type":"post","link":"https:\/\/www.fundsindia.com\/blog\/mf-research\/decoding-equity-savings-funds-are-they-right-for-you\/27636","title":{"rendered":"Decoding Equity Savings Funds: Are They Right For You?"},"content":{"rendered":"\n
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An edited version of this article was originally published in Financial Express. Click\u00a0here<\/a>\u00a0to read it.<\/span><\/em><\/p>\n\n\n\n

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In our previous blog<\/a>, we had talked about evaluating Equity Savings Funds<\/strong> as a debt fund alternative<\/strong> for <\/strong>those who do not mind slightly higher volatility <\/strong>and have a 3-5 year time horizon<\/strong>.<\/p>\n\n\n\n

Now let\u2019s take a closer look at this category to understand if these funds are right for you.<\/p>\n\n\n\n

What are Equity Savings Funds?<\/span><\/strong><\/h3>\n\n\n\n

Equity Savings Funds<\/strong> are debt oriented hybrid funds<\/strong> which invest<\/strong> in a mix of debt, arbitrage and equity<\/strong>.<\/p>\n\n\n\n

They usually have a (net) equity exposure of 20-40%<\/strong> with debt & arbitrage<\/strong> accounting for the remaining 60-80%<\/strong> – thus broadly resembling a portfolio with 30% Equity and 70% Debt<\/strong>. <\/p>\n\n\n\n

For any fund to qualify for equity taxation, the exposure to Indian equities must be above 65% of the overall portfolio.<\/p>\n\n\n\n

Equity Savings Funds enjoy equity taxation as the funds use arbitrage <\/strong>(which delivers returns similar to debt funds but is considered as equity from the tax angle) along with pure equity exposure <\/strong>to maintain overall equity exposure above 65%.<\/strong><\/p>\n\n\n\n

Are equity savings funds right for you?<\/span><\/strong><\/h3>\n\n\n\n

Here is a simple 3-point checklist to help you decide.<\/p>\n\n\n\n

Check 1: You are okay with a slight increase in volatility<\/span><\/strong><\/h4>\n\n\n\n

As roughly 30% of the portfolio is in equities, you may witness temporary declines<\/strong> if equity markets correct.<\/p>\n\n\n\n

While these declines are much lower compared to pure equity funds, they can be significant especially during phases of large equity market declines (read as declines over 30%).<\/p>\n\n\n\n

So how volatile can these funds get?<\/p>\n\n\n\n

As the equity savings category became popular and got standardised only post-2018, we will use a 30% Equity : 70% Debt portfolio as proxy to get a rough sense of performance over the last 15 years.<\/p>\n\n\n\n

Historically, the intra-year declines<\/strong> of our hypothetical equity savings portfolio has ranged between -1% and -5%<\/strong> in normal years.<\/p>\n\n\n\n

During years of major market declines, the declines were much higher<\/strong> at -14% (2008 Global Financial Crisis) <\/strong>and -11% (2020 Covid Pandemic).<\/strong><\/p>\n\n\n\n

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Therefore, if you are investing in Equity Savings Funds you need to be okay with <\/strong><\/p>\n\n\n\n