What Are Equity Savings Mutual Funds?

New Delhi: Included in SEBI’s Hybrid category of mutual funds, equity savings is an innovative investment that invests majorly in the equity market combined with debt instruments. Safer than equity funds and more tax-efficient than debt funds, these hybrid mutual funds are worth exploring before making any investment decisions.

What Are Equity Savings Mutual Funds?

In India, equity savings schemes are also called equity savings mutual funds or ESS funds. They are open-ended mutual fund schemes that invest in a combination of equity and debt assets. They are a relatively new financial instrument in India and are considered safer than pure equity funds and more tax-efficient than pure debt funds.

An equity saving fund is a type of mutual fund that invests at least 65% of its assets in stocks, up to 35% in debentures and 5% in arbitrage opportunities. 

Their sources of income include when they invest on bonds, stocks, derivatives, and carry out an arbitrage. They may provide better returns than bank fixed deposits for similar tenors.

Features of Equity Savings Mutual Funds:

Equity Savings Mutual Funds have several key features:

• Risk-Reward Ratio: These funds invest in both stocks and debt, making them less risky than pure equity funds. However, the performance of the underlying instruments affects the NAV of the funds, and returns might change with market fluctuations.

• Allocation: As per rules from SEBI, an equity savings fund can put money in shares, debt, and chances to make a profit from price differences, using methods to reduce risk. A minimum of 65% of assets must be allocated to equity, with a maximum of 10% allocated to debt securities.

• Diversification: The investment pattern followed by Equity Savings Fund is what sets it apart from other traditional investment schemes as it invests in equity and debt.

• Quality Returns: Equity Savings Funds have given consistent returns over the past few years, with less uncertainty. The use of arbitrage, a key strategy for these funds, involves taking advantage of varying prices in different markets for the same security to generate returns.

• Moderate Risk Exposure: The portfolio wisely distributes investments among these three financial tools based on market trends, which helps reduce the market risk tied to investing in equities.

Why Should You Invest in Equity Savings Schemes

Equity Savings Schemes are a good investment choice due to their balanced mix of equity, debt, and arbitrage instruments. They offer the dual benefits of capital appreciation and income generation while managing risk. 

These funds generate returns higher than traditional fixed-income investments and provide some downside protection during market downturns.

They offer better liquidity. 

Diversification within the portfolio enhances its safety, promising superior returns compared to bank fixed deposit schemes. They are ideal for investors seeking a diversified portfolio with low risks, steady income, and potential for wealth creation.

Conclusion 

Equity savings mutual funds are good for diversifying funds between equity and debt instruments. They are suitable for investors seeking lower risk compared to pure equity funds. However, conduct your research before making an investment decision.