Many risk-averse investors who seek returns beyond traditional fixed-income options consider equity saving funds for investments. However, with the surge in bank credit, there is a probability of a hike in bank deposit rates.
According to recent data from the Reserve Bank of India (RBI), bank deposits increased by 6.6 per cent to Rs 149.2 lakh crore in April-August 2023, while bank credit grew by 9.1 per cent to Rs 124.5 lakh crore for the same period.
With bank deposit rates poised to rise, it’s therefore crucial to assess the appeal of equity savings funds that have a huge amount of fixed asset income allocation in them, and whether they hold as much appeal now.
Equity Savings Funds (ESFs) fall under the category of hybrid funds as defined by the Securities and Exchange Board of India (Sebi) and they should consist of equity and equity-related instruments (minimum 65 per cent) and debt instruments (minimum 10 per cent).
In practice, ESFs aim to offer a blend of equity, debt, and arbitrage opportunities. They allocate a portion of their assets to pure equities (usually 30-40 per cent) and employ arbitrage strategies (approximately 25-35 per cent) to manage risk and enhance returns. A segment of portfolio (10-35 per cent) is dedicated to debt securities.
For instance, consider UTI Equity Savings Fund, the top performer in the one-year category has 66.68 per cent of portfolio invested in equity and 26.05 per cent in debt.
While the exact breakdown of pure equity and equity arbitrage is not available, the scheme's document mentions that 20-75 per cent of its equity portfolio will be allocated to arbitrage.
Though more than 65per cent is invested in equity, ESFs are characterised by their predominantly fixed-income nature, because roughly two-thirds or more of their holdings are in arbitrage and debt.
The remaining portion is allocated to equities, rendering them more stable compared to pure equity funds. Importantly, ESFs benefit from the tax treatment of equity funds due to their minimum 65 per cent allocation to equity. In equity funds, short-term capital gains (STCG) – if units are sold before one year – are taxed at 15 per cent. Long-term capital gains (LTCG) tax on equity funds is 10 per cent if the gain exceeds Rs 1 lakh in a financial year.
The collective average returns of 22 such funds, according to data from the Association of Mutual Funds in India (Amfi) stand at an impressive 10.22 per cent.
UTI Equity Savings Fund leads the pack with a remarkable 12.82 per cent return, followed closely by SBI Equity Savings Fund at 12.45 per cent and HSBC Equity Savings Fund at 12.21 per cent. Notably, a total of 13 funds have outperformed this average.
The category’s average returns for a 3-year period are equally noteworthy at 12.05 per cent. HDFC Equity Savings Fund and Mahindra Manulife Equity Savings Fund have both achieved returns exceeding 15 per cent over this tenure