Equity savings fund is a relatively new addition to the equity mutual funds collection that is available for investment. The unique thing about an equity savings fund that sets it apart from other equities is that it is a combination of debt, equity and arbitrage funds. Thus, the risk factor of investing in equity savings is much lower than investment in pure equities.
However, you must know that a considerable portion of the corpus is parked in equities, and therefore is a perfect investment option for an investor who is looking for high returns with low-risk exposure.
The investment plan followed by equity savings scheme is one of its distinguishing factors from other investment schemes. When you invest in ESS, about 30% to 35% of the total investment corpus is invest in equity-related assets and the remaining corpus is invested in deb income funds, and arbitrage funds. This makes ESS funds similar to balanced funds in terms of how they operate, but with the added advantage of arbitrage.
There are several benefits of investing in an equity savings fund.
With this scheme, nearly 50% of the funds are distributed between arbitrage and debut fundholding. Thus, they offer more stability in terms of returns as compared to investments in equity holdings. To minimise the volatility, fund managers use different derivative strategies. Also, the arbitrage portion of the funds capitalises on the inconsistency of the fund prices in different parts of the market.
A lot of financial experts have corroborated that ESS investments are best suited for those type of investors who wish to invest in equity fund but does not have the high-risk appetite. These funds are also perfect investment option for those wish to earn decent returns with low-risk exposure, and also enjoy the tax benefit.
One of the major reasons why a lot of people invest in different investment products, apart from growing their investment and earn valuable returns is to reduce their tax liability. Since equity savings fund is treated as a tax-saving equity fund you can be sure that your tax liability will be reduced to a significant extent. The long-term capital gains from stocks and equity assets is tax-free if the gains are less than Rs. 1 lakh.
If you hold the funds for more than one year, the long-term capital gains will be taxed at 10% for investments exceeding Rs. 1 lakh. However, you must know that if you redeem the short-term capital gains from the funds before a period of 12 months, it will be taxed at the rate of 15%.
The arbitrage portion of the investment is the biggest advantage of an equity savings scheme. It allows you to get stable returns. Most of the fund managers are aware that handling arbitrage funds allows low-risk returns for the investors. So, if you are looking for stable returns on your investment without high risk, ESS would be an ideal investment option for you.
The equity savings funds allow investors to have a diversified portfolio through a single investment channel. Thus, you need not analyse the performance of different types of funds and choose the one that best suits your investment goals. You can invest in ESS and leave it to the fund managers to choose the right funds for you. It is advisable that you hold such funds for a period of at least 12 months. This is because if you redeem the funds early, you may have to bear the exit load charge of 1%. Additionally, early redemption means that the returns earned are taxable.
When you invest in ESS, the equity portion of the investment is considered as security to maximize the returns. Thus, equity and derivate exposure is considered for equity allocation, and consequently, they are treated as equity assets. Therefore, for the purpose of taxation, equity savings scheme is treated as equity funds, and are liable for certain tax deductions.