A mutual fund that offers equity, arbitrage and debt
Over the last three years, this category of funds has given a return of 7.05%.
Equity savings funds are a hybrid category of mutual funds. They are relatively low-risk product that invests in a mix of stocks, debt and arbitrage opportunities. The scheme will invest in both equity and debt securities, employing a combination of three investment strategiespure equity (net long equity), arbitrage, and debt. The net long equity exposure is aimed to generate capital appreciation, while arbitrage opportunities and allocation to debt securities provide income and generate stable returns.
How is the product structured?
Typically equity could constitute 65-90% of the portfolio of which arbitrage opportunities could be 25-75%, unhedged equities 15-40% and debt and money market instruments 10-35% of the portfolio. More the fund manager is positive on equities, higher could be the proportion of it in the portfolio. Typically fund managers keep it between 20-35%. The equity component is invested in large cap funds, while most funds conservatively managed the debt portion investing largely in AAA-rated paper or government securities with low duration.
How is the portfolio of such funds structured?
The portfolio of such funds is structured in such a way that the corpus set aside for investing in stocks and arbitrage remains above 65%. This helps these funds being classified as equity mutual funds and enjoy equity taxation. With equity taxation, investors pay 15% for short-term capital gains for investments held for less than a year and 10% for long-term capital gains, if held for more than a year.
What kind of returns have these funds given? Who should put money in such funds?
Over the last three years, as per data from Value Research, this category of funds has given a return of 7.05%. Financial planners feel these funds make sense to investors looking to invest in equities for the first time, or for those who want low volatility. These funds are suitable for those looking for some equity exposure but do not have a very long time horizon and looking for less volatility in returns. They cannot substitute a pure equity funds, which are there in long-term portfolios, and fit those with a 1-3 year time frame who come in for equity taxation which is lower than that for debt-oriented funds for a shorter time frame.