Understanding the Equity Savings Scheme in Mutual Funds
Equity savings schemes are mutual fund plans that allocate their funds to equity funds, debt funds, and arbitrage. By diversifying across different segments, ESS aims to optimise returns while managing risk effectively, making it appealing to traditional investors seeking high returns while maintaining a level of risk mitigation.
This investment approach distinguishes ESS from conventional schemes, with around 30%-35% of the investment dedicated to equities and the remaining split between debt income funds and arbitrage.
The equity portion safeguards investors against purchasing power erosion, while the debt and arbitrage segments act as buffers against market fluctuations. If the equity market experiences a 10% decline, the returns from the debt and arbitrage segments could help minimise the overall loss, ensuring a relatively stable return compared to traditional equity schemes.
Understanding the Taxability of Equity Saving Scheme
An investment could provide a 100% return but if you do not consider the applicable tax rates, it’s not a wholesome rate of measure. Here are the tax treatment pointers you must take into account before you invest in the Equity savings scheme:
- In terms of taxation, equity savings schemes are classified as equity assets for tax purposes.
- Any gains from holding ESS for more than 12 months are subject to a 10% tax rate. However, if the gains are less than Rs 1 lakh, the gains are not subject to any taxes.
- Investments held for less than one year incur a tax rate of 15%.
Advantages of Investing in an Equity Savings Scheme
Stability in Returns
- Equity savings schemes allocate over 50% of funds into debt and arbitrage holdings which ensures more stable returns compared to pure equity investments.Fund managers employ derivative strategies to reduce volatility, while the arbitrage component capitalises on price inconsistencies across markets.
This stability makes ESS an attractive option for investors seeking consistent returns.
Arbitrage Opportunities
- The arbitrage segment of these funds provides significant advantages in terms of stable returns.
- Fund houses are proficient in arbitrage techniques, which offer low-risk returns by prioritising stability in their investment portfolios.
Diversified Portfolio
- Leading equity savings funds offer diversification through a single investment vehicle.
- Investors are relieved from the task of analysing and selecting individual funds, as ESS provides exposure to a range of assets managed by professionals.
- This diversification enhances risk management and simplifies investment decisions for investors.
Comparison between top 3 Equity Savings Scheme Funds
India has witnessed a rise in Equity Savings Scheme Funds in the last 2 decades. Here is the return the 3 funds have achieved in the last 3 years. From the data, we can see that the SBI Equity savings scheme has achieved the best returns with a slight margin of 0.2% above HDFC and Kotak Equity savings schemes.
Investors need to note that holding these funds for more than 12 months is advisable, as early redemption may incur an exit load charge of 1%.
Returns earned over the years | |||
Since Inception | 1 year | 5 year | |
HDFC Equity Savings Fund | 9.57 | 16.77 | 10.76 |
Kotak Equity Savings Fund | 9.43 | 18.05 | 10.76 |
SBI Equity Savings Fund | 8.96 | 19.78 | 10.96 |
