EQUITY SAVINGS FUNDS
Ideal for investors seeking FD-plus returns, low volatility
ESFs offer a blend of equity, debt, and arbitrage with lower
volatility than pure equity funds, which is appealing amid recent market
swings. They also deliver tax-efficient returns. As of January 31, 2025, ESFs
managed assets worth RS 42,161 crore (Association of Matual Funds in India
data).
How ESFs work
ESFs allocate up to 65 per cent of assets across stocks and
arbitrage. Typically, 15-35 per cent is invested in stocks, and the rest in
spot-future arbitrage and bonds. Though fund managers have flexibility in stock
and bond selection, portfolios usually comprise large cap stocks and
high-quality bonds, besides government securities.
ESSFs are classified as equity-oriented for tax purposes,
with gains above RS 1.25 lakh on units sold after a year taxed at 12.5 per
cent.
Manage volatility well
ESFs are less volatile owing to their diversified mix. These funds are relatively less volatile compared to pure equity schemes as they invest only a portion of their portfolio in unhedged equity and the rest in stable asset classes like debt and arbitrage, which together form a large part of the portfolio. Diversification mitigates risk.
The diversification across these asset classes, which often
exhibit low correlation with each other, aims to enhance the potential for
superior risk-adjusted return over the medium to long term compared to
investing solely in individual asset classes.
Alternative to debt
ESFs can outperform fixed deposits over three-and five-year
horizons. ESFs with the ability to offer moderate and tax-efficient returns
with tolerable level of volatility, serve as a good alternative to
debt-oriented mutual funds or traditional fixed-income instruments. Long-term
capital to be parked in fixed income can be put into ESFs.
They can be considered as a stable investment option during
periods of market uncertainty while still capturing some upside from marginal
equity exposure.
ESFs are not entirely risk-free. Market-related
uncertainties and volatility can impact their near-term returns.
Short-term losses are possible due to equity exposure. Over
the month ended March 5, ESFs have lost 2.04 per cent on average. All the asset
classes carry their own risks.
Risks stem from equity market fluctuations impacting returns
and arbitrage opportunities drying up during phases of low volatility. The debt
portion faces interest rate sensitivity, a factor in today’s environment.
Credit risk in debt instruments is also a factor to watch, so we only stick to
government and high-quality corporate bonds. Investors must be prepared for
long-term returns being lower than from pure equity funds.
For conservative investors
ESFs suit conservative investors looking for moderate equity
exposure. Conservative investors seeking reasonable, tax-efficient returns with
lower volatility may find these funds suitable for allocation a significant
portion of their surplus capital.
Before investing, investors should assess asset allocation
and check the portfolio construction. They must enter with a minimum three-year
horizon.
For More Details: Pooja Manoj Gupta, visit www.giia26.com
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