Equity Saving Scheme – Meaning, Taxation & Returns of Equity Savings Funds
Asset allocation requires investors to diversify into various asset classes, including equity and debt. A hybrid fund like an equity savings scheme can give investors exposure to equity and debt in a single mutual fund scheme. This blog discusses equity saving scheme – Meaning, taxation & returns of equity savings funds.
What is an equity saving fund?
An equity saving fund is an open-ended scheme investing in equity, arbitrage, and debt instruments. The scheme invests a minimum of 65% of its total assets in equity and equity-related instruments and a minimum of 10% of its total assets in debt.
Equity savings schemes are a subcategory under the broader category of hybrid mutual funds. From a taxation point of view, an equity savings scheme is treated as an equity scheme as a minimum of 65% of its total assets are always invested in equity and equity-related instruments.
What is the purpose of an equity savings scheme?
The purpose of an equity savings scheme includes the following:
- To lower the volatility than a pure equity fund
- To generate higher returns than a pure debt fund
- Provide tax efficiency of an equity fund to investors
Taxation of equity savings schemes
For taxation purposes, equity saving schemes are treated as an equity scheme and taxed accordingly.
Short-term capital gains (STCG) tax: If you sell your equity savings scheme units within twelve months of purchase, the capital gain will be classified as short-term capital gain (STCG). The short-term capital gain (STCG) tax will be levied at 15%.
- Long-term capital gains (LTCG) tax: If you sell your equity savings scheme units after twelve months of purchase, the capital gain will be classified as long-term capital gain (LTCG). Every financial year, the first Rs. 1 lakh long-term capital gain will be exempt from taxation. The incremental long-term capital gain above Rs. 1 lakh will be taxed at 10%.
Who should invest in an equity savings scheme?
As an investor, you should invest in an equity savings scheme if you are looking for the following parameters:
Diversification into multiple asset classes through a single mutual fund scheme
As per your asset allocation, if you are looking for exposure to equity and debt securities through a single mutual fund scheme, you may consider investing in an equity savings scheme. The scheme usually takes an equity exposure of around 40% (+/-10%), debt exposure of around 20%, and remaining exposure to arbitrage opportunities. These exposures are managed dynamically based on market opportunities. So, an investor gets exposure to multiple asset classes wherein the exposure is managed dynamically.
Long term wealth creation
As discussed earlier, the fund takes an equity exposure of around 40% (+/-10%). In the long run, equity has the potential to give inflation-beating high returns and thus create wealth for investors. An investor who has a moderate risk profile, but is looking for equity exposure, may consider investing in an equity savings scheme.
Tax-efficient investment product
An equity savings scheme provides you exposure to equity and debt. But, it gives you the advantage of the tax treatment of an equity fund. Hence, you may consider investing in an equity savings scheme.
An equity savings scheme lies somewhere between a pure debt fund and a pure equity fund. While the equity exposure may be at 40% (+/-10%), a lot of this is hedged with arbitrage opportunities. It helps bring down the fund volatility to lower levels than that of a pure equity fund. An arbitrage opportunity involves buying a security at a low price in one market (for example, BSE) and selling it at a higher price in another market (for example, NSE).
An equity savings fund takes a combined exposure of around 60% to debt and arbitrage opportunities. The debt exposure involves buying securities with high credit quality, such as Government securities or high-rated corporate bonds. These securities help the scheme generate regular income. Thus, an equity savings scheme can be used by an investor to generate regular income.
Returns of an equity savings scheme
Let us look at the returns given by equity savings schemes.
|Scheme name||AUM (Rs. crores)||1-year||3-years||5-years|
|Sundaram Equity Savings Fund||301||19.33%||14.20%||11.40%|
|Axis Equity Saver Fund||1,160||13.47%||11.77%||10.73%|
|Edelweiss Equity Savings Fund||333||12.26%||11.78%||10.61%|
|HDFC Equity Savings Fund||2,520||18.07%||11.55%||10.17%|
|SBI Equity Savings Fund||2,218||12.93%||12.17%||10.05%|
Note: The above returns are as of 27th Jan 2022. These are returns for direct plans with growth option. The returns for one-year are absolute. The returns for three and five-years are CAGR. The ranking for funds is based on five-year performance.