An equity savings fund is an open-ended mutual fund scheme that invests primarily in equities, derivatives, arbitrage, and debt securities to generate returns. Although it belongs to the riskiest class of mutual funds in India, it has the potential to generate higher returns than both debt and hybrid funds. Also, unlike other kinds of hybrid funds, its overall equity exposure is partially hedged. Therefore, it provides investors with an opportunity to create a relatively safer portfolio.
Under the equity savings fund, you can invest in equities and derivative strategies and keep your equity exposure limited (usually at 65%) while investing the rest in fixed-income securities. It even helps you to qualify for tax benefits. However, they do carry the risks of market fluctuations and are considered ideal for long-term financial goals. So, you should follow the stock markets and possess knowledge of the quantitative and qualitative factors to maximize returns from the investments.
An equity savings fund requires an active investing style or a competent fund manager. It offers a wide range of attractive features that ensures several benefits to the investors, such as:-
Expert Fund Management
For investing in an equity savings fund, one needs to understand the nuances of equity markets. That is why most investors avail the services of professional fund managers and enjoy the potential of higher returns over the long term. They guide investors at each step and make changes in the portfolio according to the fluctuations in the market.
Another feature of an equity savings fund is that it allows you to invest in multiple stocks with a single investment product and achieve portfolio diversification. Your fund manager can pick stocks depending on their fundamental strength, growth potential, and the investment objective of the scheme. If your fund manager anticipates any market correction in the near future, he/she can reduce the equity allocation of the portfolio. It helps in containing any possible losses and keeping the risk exposure of the portfolio at a moderate level.
Potential of Higher Returns
If you have the right knowledge of financial markets or an experienced fund manager, you can increase the possibility of better returns from your investment. Equity savings fund allows using arbitrage that involves capitalizing on the price fluctuation of securities in different markets. Since these funds have been mostly generating consistent returns over the past few years, you can park your money for a short duration as well and maximize the returns. However, you should be aware of the market risks involved and choose the stocks wisely.
Equity savings funds have reduced tax liability because they are treated as equity funds for the purpose of taxation. If you hold the investment for more than 12 months, the returns (below 1 lakh rupees) are exempt from taxation. However, you may be subjected to higher taxes if you redeem the gains from these funds within 12 months.
Equity savings funds offer capital appreciation with greater tax efficiency along with the benefit of portfolio diversification. That is why they are the preferred choice of investors who wish to maintain a moderate risk profile and generate higher returns.