Equity Oriented Saving/Income Funds – A good bet in falling market

Jitender Singh, Deputy Manager-Research, IIFL | Mumbai | September 26, 2017 13:20 IST

Putting money in a savings account and FD is also not a prudent decision as the interest rates are low and taxed. In a scenario where investors don’t want to take risk in the equity market and don’t want to invest in debt investment because of their low returns, one can choose to invest in Equity Oriented Saving/Income Funds.

As the Indian market has corrected ~2.8% in last 5 trading sections over rising geopolitical tensions and slow down in the GDP growth, investors are confused where to park their hard earned money to earn better risk-reward. Putting money in a savings account and FD is also not a prudent decision as the interest rates are low and taxed. In a scenario where investors don’t want to take risk in the equity market and don’t want to invest in debt investment because of their low returns, one can choose to invest in ‘Equity Oriented Savings/Income Funds’.

Equity-oriented saving/income funds invest in equity, derivative and debt in such a way that the overall risk should be minimum. Since the total equity exposure (including derivatives) is more than 65%, these funds are considered as equity-oriented funds for taxation. Thus, there is no tax on capital gains after 1 year.

Allocation is based on PE/PB ratio: The allocation between equity and debt is based on parameters like PE ratio and/or PB ratio. Therefore, funds increase their allocation to equity when the equity market is undervalued and vice versa, to generate a better risk-reward. Fund also seeks for arbitrage opportunities to offer superior risk-adjusted returns in long term.

For example, assume that the PE ratio of Nifty 50 is 20x and the required asset allocation as per the PE model is 40% in equities and 40% in fixed income. In this scenario, the fund will invest 65% in equities and hedge 25% equity exposure by selling stock futures of the underlying stocks that it holds. Therefore, the net equity holding will reduce to 40% from 65%. The hedge position will earn returns similar to fixed income securities due to the arbitrage opportunities between the stock in the cash market and their future's price.

Benefits of investing in these types of funds:
  • Superior risk-adjusted returns in long term since the AUM is invested in equity, derivatives, and debt.
  • Funds are less volatile than pure equity funds as a significant portion of the AUM is allocated in debt instrument and arbitrage opportunities.
  • Investors can expect better post-tax returns than pure debt funds since these funds are considered as equity funds for taxation.
We recommend investors to invest in the following funds:

Scheme Name

Category

Corpus (Rs Cr)

1 M (%)

6 M (%)

1 Y (%)

3 Y (%)

5 Y (%)

HDFC Equity Savings Fund(G)

Savings / Income

2387

0.3

5.3

12.3

10.6

10.6

ICICI Pru Equity Income Fund(G)

Savings / Income

2549

0.1

3.2

7.0

--

--

Reliance Equity Savings Fund(G)

Savings / Income

1116

0.4

7.4

11.2

--

--


Returns less than 1 year are absolute; Returns greater than 1 year are CAGR.
Corpus as on: August 2017; Returns as on September 25, 2017

Source: ACE MF 

Disclaimer: The contents herein is specifically prepared by ‘Dalal Street Investment Journal’, and is for your information & personal consumption only. India Infoline Limited or Dalal Street Investment Journal do not guarantee the accuracy, correctness, completeness or reliability of information contained herein and shall not be held responsible.

 

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